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DISTRIBUTED RELIABILITY
AMY L. STEIN*
For the past century, electric utilities and grid operators
have both owned and operated resources to maintain the
reliability of the grid. This reliability has been controlled
through investments in generation, transmission, and
distribution assets. Today, a growing number of previously
passive customers are much more involved in generating
their own electricity. But this customer involvement does not
stop with generation. Customers are also contributing energy
storage and demand response (DR) to the grid, reliability
resources that are an essential component of supporting
intermittent, renewable energy. This Article draws upon
economic analyses of industrial organization and principalagent theory to illuminate the tensions caused by the
separation of ownership of these reliability resources from
those who control the reliability of the grid. Given the
current decentralized structure of the utility industry and the
regulatory limits on utility ownership of these reliability
resources, it then argues for mechanisms that allow for a
more successful integration of these privately owned energy
resources into a public grid.
INTRODUCTION.......................................................................... 888 I. THE THEORY OF THE FIRM AND THE ELECTRIC UTILITY
INDUSTRY ......................................................................... 897 A. Pre-Restructuring “Make” Utilities ......................... 901 B. Post-Restructuring “Make and Buy” Utilities ......... 903 II. SEPARATION OF OWNERSHIP AND CONTROL OF
RELIABILITY RESOURCES ................................................. 907 A. Customer Ownership: “Make and Buy Plus” .......... 912 * Associate Professor, University of Florida Levin College of Law. I am
grateful to Stephanie Bornstein; Mark Jamison; Alex Klass; Christine Klein;
Elizabeth Lear; Sean Meyn; Uma Outka; Richard Pierce; Robert Rhee; Jim Rossi;
David Spence; Daniel Sokol and the participants in the Northwestern Searle
Center’s Conference on Electricity for their valuable feedback; the University of
Kansas Law School faculty; and my tireless research assistants, Wesley Hevia
and Michael Woods, for their outstanding assistance.
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1. Energy Storage ................................................. 916 2. Demand Response ............................................ 926 B. Transaction Costs of Customer-Owned Reliability
Resources .................................................................. 930 1. Divergent Interests .......................................... 931 2. Asymmetric Information .................................. 936 III. BRIDGING THE GAP BETWEEN OWNERSHIP AND
CONTROL OF RELIABILITY RESOURCES ........................... 941 A. Increasing Visibility of Private Reliability
Resources .................................................................. 944 B. Coordinating Customer Reliability Resources ........ 947 C. Contracting Customer Resources for Public
Purposes ................................................................... 951 D. Utility Ownership of Reliability Resources ............. 956 CONCLUSION ............................................................................. 961 INTRODUCTION
In late 2012, when Hurricane Sandy knocked out power
throughout New Jersey, Princeton University shone as a
beacon in the dark.1 Using power from its own natural gas and
solar facilities, “the University served as ‘a place of refuge,’
with police, firefighters, paramedics and other emergencyservices workers from the area using Princeton as a staging
ground and charging station for phones and equipment.”2 This
Princeton “microgrid” reflects resiliency, but also demonstrates
the capacity of privately distributed resources to satisfy
electricity demand. Such an endeavor is not without its
problems, however, as an increase in self-generation also
causes headaches for grid operators charged with maintaining
a constant balance between supply and demand.3 It also
1. Morgan Kelly, Two Years After Hurricane Sandy, Recognition of
Princeton’s Microgrid Still Surges, PRINCETON U. (Oct. 23, 2014, 2:00 PM),
http://www.princeton.edu/main/news/archive/S41/40/10C78/index.xml?
section=featured [https://perma.cc/A75M-RYUH].
2. Id.
3. See, e.g., ROBERT ELLIOT, CAL. PUB. UTILS. COMM’N, THE INTEGRATION OF
DISTRIBUTION LEVEL GENERATION & STORAGE INTO THE GRID, at ii–iii (2014),
http://www.cpuc.ca.gov/NR/rdonlyres/DD76B018-7203-4864-B391-7DE680BA9E
68/0/ReportLatestAugust2014Version.pdf [https://perma.cc/XK47-R6RS]. On the
Hawaiian island of Oahu, “PV penetrations now exceed 75 percent of peak load on
many of the Hawaiian Electric Company’s (HECO’s) distribution circuits,” which
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engenders some significant resistance from utilities poised to
lose revenues to those who self-generate.4 This resistance has
gained enough traction that the electric utility industry group,
Edison Electric Institute, referred to the increase in
“distributed generation”—i.e., generating electricity at the
place of use as opposed to at a centralized power plant—as the
impending “death spiral” for utilities, grabbing headlines
across the country.5
This increased customer involvement in the provision of
grid resources does not stop with generation. Customers are
also contributing two resources that assist with maintaining
the reliability of the grid: (1) energy storage; and (2) demand
response (DR),6 assets that this Article refers to as “reliability
resources.” When needed, energy storage can quickly inject
previously generated electricity and DR can quickly reduce
electricity demand.7 Both are essential reliability resources,8
can cause problems for outdated electricity grids. RYAN EDGE ET AL., SOLAR ELEC.
POWER ASS’N & ELEC. POWER RES. INST., UTILITY STRATEGIES FOR INFLUENCING
LOCATIONAL DEPLOYMENT OF DISTRIBUTED SOLAR, https://www.
THE
solarelectricpower.org/media/224388/Locational-Deployment-Executive-SummaryFinal-10-3-14.pdf [https://perma.cc/ ZZ62-6CXJ]; see, e.g., Herman K. Trabish,
How Utilities Can Mitigate Grid Impacts of High Solar Penetrations, UTILITY
DIVE (Oct. 16, 2014), http://www.utilitydive.com/news/how-utilities-can-mitigategrid-impacts-of-high-solar-penetrations/320407/ [https://perma.cc/5CTJ-LUL2].
4. Grace Hsu, Net Metering Wars: What Should We Pay for Distributed
Generation?, BERKLEY ENERGY & RES. COLLABORATIVE (Feb. 24, 2014),
http://berc.berkeley.edu/net-metering-wars-pay-distributed-generation/
[https://perma.cc/2HEK-G8BD].
5. PETER KIND, EDISON ELEC. INST., DISRUPTIVE CHALLENGES: FINANCIAL
IMPLICATIONS AND STRATEGIC RESPONSES TO A CHANGING RETAIL ELECTRIC
BUSINESS
3
(2013),
http://www.eei.org/ourissues/finance/Documents/
disruptivechallenges.pdf [https://perma.cc/AGY9-745Y]; Press Release, Navigant
Research, Proactive Consumers and Distributed Generation are Transforming the
Traditional Utility Business Model (Dec. 4, 2014), https://www.navigant
research.com/newsroom/proactive-consumers-and-distributed-generation-aretransforming-the-traditional-utility-business-model
[https://perma.cc/AY6V2TC2]. Severin Borenstein & James Bushnell, The U.S. Electricity Industry After
20 Years of Restructuring 24, 26 (Energy Inst. at Haas, Working Paper No. 252R,
2015).
6. The Federal Energy Regulatory Commission (FERC) defines demand
response as “[c]hanges in electric usage by demand-side resources [customers]
from their normal consumption patterns in response to changes in the price of
electricity over time, or to incentive payments designed to induce lower electricity
use at times of high wholesale market prices or when system reliability is
jeopardized.” FERC, REPORTS ON DEMAND RESPONSE & ADVANCED METERING
(2014),
http://www.ferc.gov/industries/electric/indus-act/demand-response/demres-adv-metering.asp [https://perma.cc/YL7Y-QTBP].
7. Energy efficiency resources provide a similar function, but they are
nondispatchable and noncontrollable such that they have limited use to address
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and both are becoming increasingly valuable as more
renewable energy supports our electricity needs.9
Legal scholars have begun to explore barriers and
solutions for integrating distributed generation resources into
the grid,10 but have largely neglected the impacts of these
corresponding distributed reliability resources. This Article fills
this critical gap by addressing the growth of these customerowned reliability resources and by situating their development
the minute-by-minute fluctuations of the grid.
8. See, e.g., MICHAEL P. LEE ET AL., FED. ENERGY REGULATORY COMM’N,
ASSESSMENT OF DEMAND RESPONSE AND ADVANCED METERING 1, 14 (2014),
https://www.ferc.gov/legal/staff-reports/2014/demand-response.pdf [https://perma.
cc/7PES-FEM3] (recognizing DR “made significant contributions to balancing
supply and demand during the late 2013 and early 2014 extreme cold weather
events and helped preserve . . . reserve levels” in its assessment of DR as a
“reliable resource”). The Connecticut Department of Energy and Environmental
Protection “strongly believes that DR can be a cost-effective option to ensure
reliability and minimize price increases, especially during peak hours when active
DR can be dispatched.” CONN. DEP’T OF ENERGY & ENVTL. PROT., 2014
INTEGRATED
RESOURCES
PLAN
FOR
CONNECTICUT
84
(2015),
http://www.ct.gov/deep/lib/deep/energy/irp/2014_irp_final.pdf
[https://perma.cc/
T3QB-QHX7]; NAT’L RENEWABLE ENERGY LABS, ISSUE BRIEF: A SURVEY OF STATE
POLICIES TO SUPPORT UTILITY-SCALE AND DISTRIBUTED-ENERGY STORAGE (2014),
http://www.nrel.gov/docs/fy14osti/62726.pdf [https://perma.cc/C7RB-JR8K] (noting
the ability of storage to provide ramping and regulation support in light of
increased renewable energy on the grid); N. AM. ELEC. RELIABILITY CORP. & CAL.
INDEP. SYS. OPERATOR CORP., 2013 SPECIAL RELIABILITY ASSESSMENT:
MAINTAINING BULK POWER SYSTEM RELIABILITY WHILE INTEGRATING VARIABLE
ENERGY RESOURCES—CAISO APPROACH 14, 25 (2013), http://www.nerc.com/
pa/RAPA/ra/Reliability%20Assessments%20DL/NERC-CAISO_VG_Assessment_
Final.pdf [https://perma.cc/4M2Q-CTEB]; U.S. DEP’T OF ENERGY, GRID ENERGY
STORAGE 7 (2013) (noting energy storage systems “can address issues with the
timing, transmission, and dispatch of electricity, while also regulating the quality
and reliability of the power generated by traditional and variable sources of
power. ESS can also contribute to emergency preparedness.”).
9. Meredith Fowlie, Renewable Integration Challenges Create Demand
Response Opportunities, ENERGY INST. AT HAAS (Sept. 2, 2014),
https://energyathaas.wordpress.com/2014/09/02/renewable-integration-challengescreate-demand-response-opportunities/ [https://perma.cc/TQ43-FV7B]; U.S. DEP’T
OF ENERGY, supra note 8, at 9 (“Storage technology can help contribute to overall
system reliability as large quantities of wind, solar, and other renewable energy
sources continue to be added to the nation’s generation assets.”).
10. See, e.g., Amy L. Stein, Reconsidering Regulatory Uncertainty: Making a
Case for Energy Storage, 41 FLA. ST. U. L. REV 697 (2014); Joel Eisen, Smart
Regulation and Federalism for the Smart Grid, 37 HARV. ENVTL. L. REV. 1 (2013);
Uma Outka, Environmental Law and Fossil Fuels: Barriers to Renewable Energy,
65 VAND. L. REV. 1679, 1680 (2012); Sara Bronin, Curbing Energy Sprawl with
Microgrids, 43 CONN. L. REV. 547 (2010); Garrick B. Pursley & Hannah J.
Wiseman, Local Energy, 60 EMORY L.J. 877 (2011); Joseph Tomain, TraditionallyStructured Electric Utilities in a Distributed Generation World, 38 NOVA L. REV.
473 (2014).
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into the broader regulatory and organizational structure of the
electric industry. This Article identifies this phenomenon of
increasing ownership of reliability resources by individual
residential, commercial, and industrial nonutility customers,
often for their own use, one which I refer to as “distributed
reliability.”
This analysis is critical because reliability of the electric
grid has emerged as an underexplored, yet essential, corollary
to distributed generation. From the attack on a generation
station in Metcalf, California11 and extreme weather events
like the polar vortex,12 to the Environmental Protection
Agency’s new greenhouse gas regulations threatening to shut
down coal power plants,13 to market conditions driving shutdowns of nuclear plants,14 reliability and resiliency15 are taking
on increasing prominence in public discourse. The federal
government is currently addressing many of the more complex
11. Thomas S. Popik & William R. Graham, Senate Should Demand Electric
Grid Reliability and Security, THE HILL (July 7, 2014, 4:00 PM),
http://thehill.com/blogs/congress-blog/energy-environment/211238-senate-shoulddemand-electric-grid-reliability-and [https://perma.cc/J6ZY-A5SX] (“In April 2013,
a sophisticated attack first cut key communication cables and then shot out 17
transformers at the Metcalf substation in California. A few more well-placed rifle
shots could have blacked out Silicon Valley and San Francisco.”).
12. Polar Vortex Effect on Electricity Prices, ENERGY RES. COUNCIL (2014),
http://energyresearchcouncil.com/Polar-vortex-effect-on-electricity-prices.html
[https://perma.cc/NZU4-VF9U]. Weather plays an important role in efforts to
maintain the reliability of the grid, with the White House documenting 144
weather disasters in the United States since 1980, with total damage costs that
exceed $1 trillion. EXEC. OFFICE OF THE PRESIDENT, ECONOMIC BENEFITS OF
INCREASING ELECTRIC GRID RESILIENCE TO WEATHER OUTAGES 9 (2013),
http://energy.gov/sites/prod/files/2013/08/f2/Grid%20Resiliency%20Report_FINAL.
pdf [https://perma.cc/3GY2-4MHA].
13. Clean Power Plan for Existing Power Plants, ENVTL. PROTECTION
AGENCY,
http://www.epa.gov/cleanpowerplan/clean-power-plan-existing-powerplants#CPP-final [https://perma.cc/499T-AQ6M] (last updated Nov. 20, 2015);
Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric
Utility Generating Units, 80 Fed. Reg. 64, 662 (Oct. 23, 2015) (to be codified at 40
C.F.R. pt. 60).
14. Emily Hammonde & David B. Spence, The Regulatory Contract in the
Marketplace, 69 VAND. L. REV. 141 (2016).
15. Resiliency is often distinguished from reliability. Resiliency addresses
“the ability to reduce the magnitude and/or duration of disruptive events. The
effectiveness of a resilient infrastructure or enterprise depends upon its ability to
anticipate, absorb, adapt to, and/or rapidly recover from a potentially disruptive
event.” TOM BOWE, THOUGHTS ON RESILIENCE AND NERC’S SEVERE IMPACT
RESILIENCE TASK FORCE (SIRTF) (2009), http://www.narucmeetings.org/
Presentations/Tom%20Bowe%20PJM%20Resiliency%20SIRTF.pdf [https://perma.
cc/T958-AHMV]. Notably, reliability assessments often exclude extreme events
from their calculations. Id.
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reliability challenges, with a particular focus on critical
vulnerabilities. The U.S. Senate’s energy committee recently
held a full committee hearing on the reliability of the electric
grid, with the presiding U.S. Senator of the committee
highlighting the growing importance of the issue as evidenced
by an electric reliability committee meeting with “standing
room only.”16 Similarly, an earlier report by the Task Force on
Department of Defense Energy Strategy found that “critical
missions . . . are almost entirely dependent on the national
transmission grid,”17 and the U.S. Energy Information
Administration found that the failure of only 4% of U.S.
substations would result in 60% of the United States losing
power.18
Reliability has two key components: (1) ensuring we have
enough resources (i.e., supply) to meet the demand for electric
power (resource adequacy); and (2) ensuring the security and
quality of the electricity that is provided (resource security).19
Resource adequacy focuses on providing enough resources to
meet the highest level of expected demand.20 In other words,
reliability includes ensuring there are enough coal, natural gas,
nuclear, and renewable resources available when needed, as
well as enough infrastructure to utilize these resources.
Critical infrastructure includes pipelines for expanding the
fleet of natural gas power plants and transmission lines to get
power where we need it. But reliability also includes making
sure that the supply of electricity is in constant balance with
the demand to ensure proper voltage and frequency. Security
focuses on system quality and having the right mix of
16. Keeping the Lights On – Are We Doing Enough to Ensure the Reliability
and Security of the US Electric Grid?, S. COMM. ON ENERGY & NAT. RES. (Apr. 10,
2014),
http://www.energy.senate.gov/public/index.cfm/2014/4/electric-gridreliability-and-security-are-we-doing-enough [https://perma.cc/P6UA-3GAB].
17. DEP’T OF DEF., REPORT OF THE DEFENSE SCIENCE BOARD TASK FORCE ON
DOD ENERGY STRATEGY:
“MORE FIGHT—LESS FUEL”
18
(2008),
http://www.acq.osd.mil/dsb/reports/ADA477619.pdf [https://perma.cc/4TJL-PC65].
18. OFFICE OF ELEC. DELIVERY & ENERGY RELIABILITY, U.S. DEP’T OF
ENERGY, THE ELECTRICITY DELIVERY SYSTEM 2 (2006), http://www.ewp.rpi.edu/
hartford/~stephc/ET/Other/Miscellaneous/USDOE_ElectricityDelivery.pdf [https://
perma.cc/UW7A-XFKG]. Substations are facilities that switch, change, or regulate
electric voltage. Glossary, U.S. ENERGY INFO. ADMIN., http://www.eia.gov/tools/
glossary/index.cfm?id=S [https://perma.cc/P78X-ARBP].
19. N. AM. ELEC. RELIABILITY CORP., FREQUENTLY ASKED QUESTIONS 1 (Aug.
2013), http://www.nerc.com/AboutNERC/Documents/NERC%20FAQs%20AUG13.
pdf [https://perma.cc/H3CK-2T4D].
20. Id.
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capabilities (balancing services) deployed to ensure that supply
and demand can be balanced in every moment, with a focus on
voltage and frequency.21 Demand changes daily, from peak
hours when air conditioning and computers are at full-blast to
nonpeak hours when most people are asleep. Demand also
changes on a seasonal basis, with summer peaks for air
conditioning and winter peaks for heating.22 On top of all of
these fluctuations, some planned, some unplanned, grid
operators also will need to deal with a future that calls for even
more electricity demand, demand that is projected to increase
each year, rising 29% by 2040.23
Traditionally, responsibility for the reliability of the grid
has rested with the electric utilities.24 For one hundred years,
these utilities have met their duty to serve with limited
interruptions, resulting in a grid that is reliable 99.95% of the
time.25 They have done so amidst significant constraints, both
physical (e.g., changing weather patterns, increasing electricity
demand, and a changing resource mix) and regulatory (e.g.,
new organizational models, enhanced competition, and open
access requirements). Electric utilities were once vertically
integrated, meaning that one utility owned and controlled all
three components of the energy industry: (1) the generation
(power plants); (2) the transmission lines (high voltage lines
that usually run along highways); and (3) the distribution lines
(low voltage lines that run outside of our homes and offices).26
21. Id.
22. Homes Show Greatest Seasonal Variation in Electricity Use, U.S. ENERGY
INFO. ADMIN.: TODAY IN ENERGY (Mar. 4, 2013), http://www.eia.gov/
todayinenergy/detail.cfm?id=10211 [https://perma.cc/B26R-HE2Q].
23. U.S. ENERGY INFO. ADMIN., DOE/EIA-0383(2014), ANNUAL ENERGY
OUTLOOK 2014, at MT-16 (2014), http://www.eia.gov/forecasts/aeo/pdf/
0383%282014%29.pdf [https://perma.cc/85J9-4FVR].
24. See Paul Joskow, Creating a Smarter U.S. Electricity Grid, 26 J. ECON.
PERSP. 29 (2012) (providing a literature review).
25. EDISON ELEC. INST., KEY FACTS ABOUT THE ELECTRIC POWER INDUSTRY
(2013), http://www.eei.org/resourcesandmedia/key-facts/Documents/KeyFacts.pdf
[https://perma.cc/R2KA-WWUL]; SAVIVA RESEARCH, DISTRIBUTED ENERGY
RESOURCE MANAGEMENT (2013), http://www.savivaresearch.com/wp-content/
uploads/2013/05/April-2013-DERMS.pdf [https://perma.cc/Y6X3-NJR9]. For more
details about how reliability is assessed, see LEE LAYTON, ELECTRIC SYSTEM
RELIABILITY
INDICES
(2004),
http://www.l2eng.com/Reliability_Indices_
for_Utilities.pdf [https://perma.cc/WHQ3-YQ4C]; see also NAT’L ASS’N OF REG.
UTIL.
COMM’RS,
ELECTRIC
DISTRIBUTION
RELIABILITY,
http://www.naruc.org/international/Documents/Electric%20Distribution%20Reliab
ility.pdf [https://perma.cc/G8DV-CYKS].
26. W.M. WARWICK, U.S. DEP’T OF ENERGY, A PRIMER ON ELECTRIC
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But this governance model faced allegations of excessive
market power and high electricity prices, as these vertically
integrated utilities functioned as monopolies and recovered
their costs through low-risk rate-based procedures.27
Today, the energy industry functions under a much
different regulatory model, one that is commonly referred to as
“restructured.”28 It can best be understood as an evolution
toward a more competitive system of generation. Since 1992,
the federal government has enacted a number of laws to open
the generation component of the energy industry to new
entrants like small power producers and merchant generators
not affiliated with an incumbent utility.29 This was
accomplished primarily through the development of wholesale
markets for electricity and open access requirements for
transmission lines.30 Included in this restructuring was a
dispersion of authority over reliability of the grid. Utilities
were no longer operating alone, but often within layers of
regional authority through Regional Transmission Operators
(RTOs), Independent System Operators (ISOs), and reliability
coordinating councils.31 These regulatory maneuvers had
significant ramifications for the ownership of energy resources.
Utilities no longer built all of their own generation and
reliability resources.32 Instead, they relied on others to build
UTILITIES, DEREGULATION, AND RESTRUCTURING OF U.S. ELECTRICITY MARKETS,
at 6.6 (2002), http://www.pnl.gov/main/publications/external/technical_reports/
PNNL-13906.pdf [https://perma.cc/DW3H-B73Z].
27. Id. at 5.1.
28. See, e.g., Severin Borenstein & James Bushnell, The U.S. Electricity
Industry After 20 Years of Restructuring, (Energy Inst. at Haas, Working Paper
No. 252R, 2015) (arguing that the legal changes that allowed for more nonutility
competition was driven by rent shifting).
29. WARWICK, supra note 26, at A.16.
30. See, e.g., Promoting Wholesale Competition Through Open Access Nondiscriminatory Transmission Services by Public Utilities; Recovery of Stranded
Costs by Public Utilities and Transmitting Utilities, 75 FERC 61,080 (1996)
[hereinafter FERC Order 888], http://www.ferc.gov/legal/maj-ord-reg/landdocs/rm95-8-00v.txt [https://perma.cc/8H3Y-HXFE]; Open Access Same-Time
Information System (formerly Real-Time Information Networks) and Standards of
Conduct, 75 FERC 61,078 (1996) [hereinafter FERC Order 889],
http://www.ferc.gov/legal/maj-ord-reg/land-docs/rm95-9-00k.txt [https://perma.cc/
3JG5-3QN6].
31. Although this Article focuses on the utility-customer relationship, many of
these concepts can be extended to other grid operators with responsibility for
reliability (e.g., the RTO-customer relationship).
32. See Paul L. Joskow, Introducing Competition into Regulated Network
Industries: From Hierarchies to Markets in Electricity, 5 INDUS. & CORP. CHANGE
341, 355–58 (1996), http://icc.oxfordjournals.org/content/5/2/341.full.pdf [https://
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such resources and bid the resulting electricity products into
the relevant wholesale markets or enter into contractual
arrangements with utilities for these necessary resources.33
Thus, while not owned by the utility, these resources were built
to serve the utility.
Continuing, and even extending, this trend of nonutility
ownership, reliability resources of the future often are being
developed to self-serve the user. This investment comes
primarily in the form of distributed energy storage, as is
evidenced from the recent surge of customer interest in Tesla’s
Powerwall and electric vehicles.34 But customers who provide
DR resources also reflect a reliability resource external to the
grid operator.35 Such distributed reliability has important
implications for the grid, particularly when one teases out the
functions of these distributed reliability resources and realizes
that some serve private purposes, some serve public purposes,
and some are a private-public hybrid.
This Article not only identifies the phenomenon of
distributed reliability, but also elicits the assistance of
economic theory to parse out the implications of this growing
separation between the individual owners of reliability
resources and those responsible for reliability of the grid. Such
implications have been well-explored in the economic literature
when evaluating the internal structure of a firm, including
analysis of the principal-agent problems associated with
diverging priorities and asymmetric information.36 This Article
perma.cc/QS8G-DLSA].
33. See Diane Cardwell, Intermittent Nature of Green Power Is Challenge for
Utilities, N.Y. TIMES (Aug. 14, 2013), http://www.nytimes.com/2013/08/15/
business/energy-environment/intermittent-nature-of-green-power-is-challenge-forutilities.html [https://perma.cc/CJ8G-E7LM].
34. See infra Section II.A.1.
35. See infra Section II.A.2.
36. Asymmetric information refers to a transaction where one party has more
or better information than the other. See generally Oliver E. Williamson, The
Theory of the Firm as Governance Structure: From Choice to Contract, 16 J. ECON.
PERSP. 171, 178 (2002); Eugene F. Fama & Michael C. Jensen, Separation of
Ownership and Control, 26 J.L. & ECON. 301 (2009), http://www.wiwi.unibonn.de/kraehmer/Lehre/SeminarSS09/Papiere/Fama_Jensen_Separation_owners
hip_control.pdf [https://perma.cc/9PMD-UVYX]; Peter Grosvenor Munzig, Enron
and the Economics of Corporate Governance (June 2003) (unpublished
manuscript) (on file with author); Wi Saeng Kim & Esmeralda O. Lyn, Going
Private: Corporate Restructuring Under Information Asymmetry and Agency
Problems, 18 J. BUS. FIN. & ACCT. 637 (1991), http://onlinelibrary.wiley.com/
doi/10.1111/j.1468-5957.1991.tb00230.x/abstract [https://perma.cc/ZV7W-7BEA];
Paul L. Joskow, Vertical Integration, 55 ANTITRUST BULL. 545 (2012).
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draws upon these economic theories of industrial organization
to better anticipate potential pitfalls associated with the
growing separation between ownership and control of
reliability resources within our grid. In short, this Article
addresses the critical question: In a world of increasing
distributed resources created to serve individual as opposed to
public needs, does there need to be some sort of regulatory
adjustment that better reflects the new ownership models?
Part I of this Article draws upon the relevant industrial
organization literature to demonstrate the evolution of electric
utilities from a “make” to a “make and buy” model. The
transaction costs theory of the firm has become a standard
framework for the study of institutional arrangements,
prompting explorations into the relative merits of vertically
integrated structures where firms produce inputs in-house
(“make”) and those where firms seek external suppliers to
provide their inputs (“buy”). This Part frames the evolution of
the utility industry through this lens, focusing on the
outsourcing that developed with respect to reliability resources.
Using this historical backdrop as a foundation for an
understanding of the growth in transaction costs surrounding
reliability resources, Part II then demonstrates how the
increase in customer-owned reliability resources is moving the
industry toward a new model, one where utilities are not only
producing some of their reliability resources in-house (“make”),
and buying other reliability resources from external
commercial suppliers (“buy”), but are also procuring external
resources from customers as opposed to external commercial
suppliers (“plus”). I develop the term “make and buy plus” to
reflect this scenario and demonstrate how customers are
becoming an important contributor of energy storage and DR
reliability resources. This Part also applies separation of
ownership and control theories to the growing separation
between nonutility, customer ownership of these reliability
resources and the utility control of reliability of the electric
grid, highlighting the additional increase in transaction costs.
It identifies some challenges of this growing separation
between ownership and control, notably the greater likelihood
of divergent interests and information asymmetries.
Part III then explores the legal tools available to better
integrate these private reliability resources into the grid. It
provides concrete mechanisms to bridge the gap between
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separation and control. First, it urges more transparency
between utilities and customers owning reliability resources.
At the very least, grid operators need better visibility of the
location and capabilities of these customer-owned resources to
assist in resource planning. Even more beneficial, however,
grid operators may be able to harness some of these customerowned resources for public use. Second, this Part urges
enhanced coordination of customer-owned resources. Third, it
evaluates the use of contract mechanisms to minimize the
transaction costs associated with public use of these resources.
The success of regulatory initiatives to integrate more
renewable energy into the electric grid hinges in large part on
ensuring the grid’s reliability. This Article argues that a
corresponding realignment in the regulatory relationship
between utilities and individual customers is a critical
component of these efforts, especially if reliability resources
continue to become more distributed among individual
customers.
I.
THE THEORY OF THE FIRM AND THE ELECTRIC UTILITY
INDUSTRY
An analysis of the changing ownership of reliability
resources can benefit from situating it within the economic
literature that assesses the tradeoffs associated with an
integrated structure that produces all its inputs in-house and
one that relies, at least in part, on outsourcing. This Part
describes the evolution of the electric industry from an
integrated to a de-integrated structure and explains its
implications for procuring essential reliability resources.
Rooted in Ronald Coase’s “theory of the firm,” economists
have long explored the boundaries between firms and markets
through the lens of “industrial organization.”37 Coase focused
37. Ronald H. Coase, The Nature of the Firm, 4 ECONOMICA 386, 393–94
(1937). In his famous observation that the organization is irrelevant if there were
no transaction costs, Coase provided a springboard for years of analysis about the
organizational implications on efficiency and the allocation of scarce resources. Id.
See also, e.g., Peter G. Klein & Lasse B. Lien, Diversification, Industry Structure,
and Firm Strategy: An Organizational Economics Perspective (Apr. 14, 2009)
(working paper), http://web.missouri.edu/~kleinp/papers/Klein-Lien_FINAL_15_
April_2009.pdf [https://perma.cc/7S3V-B39C]; Richard N. Langlois, Transaction
Costs, Production Costs, and the Passage of Time (Univ. of Conn. Dep’t of Econ.
Working Paper Series, Working Paper No. 1995-03, 1995) http://web2.uconn.edu/
economics/working/1995-03.pdf [https://perma.cc/QFC9-8KUQ].
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on the question of why some firms integrate and why some
firms rely on the “price mechanism” (markets), referred to here
as the “make or buy” decision.38 More recently, scholars have
recognized that such structures are often not “make or buy,”
but “make and buy.”39 This plural sourcing strategy reflects the
real-world grey areas where regulated firms may engage in
both internal and external transactions.40
Coase theorized that the answer does not simply turn on
the productive capacity of the firm, but it also turns on the
associated transaction costs, focusing the analysis on the
relative costs of internal versus external exchange.41
Transaction costs are often broadly divided into three
categories: (1) search and information costs; (2) bargaining
costs; and (3) policing and enforcement costs.42 Coase’s theories
have led to an entire branch of economics called “transaction
cost economics”43 and have led to almost eighty years of
analysis on understanding the boundary between firms and
markets in an effort to achieve the optimal governance model,
the choice in structure of the firm, and the nature of
contractual relationships between firms at different levels of
the production chain.44
38. Coase, supra note 37, at 387 .
39. See generally, Mari Sako et al., How Do Firms Make-and-Buy? The Case of
Legal Services Sourcing by Fortune 500 Companies (working paper) (July 2013).
40. Id. Despite its applicability to electric utilities, plural sourcing has not
been commonly applied to the energy literature.
41. Coase, supra note 37, at 396 (“[T]he costs of organising certain
transactions within the firm may be greater than the costs of carrying out the
exchange transactions in the open market.”).
42. R.H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1, 15 (1960) (“In
order to carry out a market transaction it is necessary to discover who it is that
one wishes to deal with, to inform people that one wishes to deal and on what
terms, to conduct negotiations leading up to a bargain, to draw up the contract, to
undertake the inspection needed to make sure that the terms of the contract are
being observed, and so on.”).
43. See Keith Crocker & Scott Masten, Regulation and Administered
Contracts Revisited: Lessons from Transaction-Cost Economics for Public Utility
Regulation, 9 J. REG. ECON. 5, 7 (1996) (“Coase’s insight was important both for
drawing attention to the potential for transactors to resolve on their own
problems that were thought to require government action and for demonstrating
that the efficiency of alternative institutional arrangements turned on transaction
cost comparisons.”).
44. See, e.g., Paul L. Joskow, Asset Specificity and the Structure of Vertical
Relationships: Empirical Evidence, 4 J.L. ECON. & ORG. 1, 96 (1988); Williamson,
supra note 36, at 175 (identifying the three key dimensions of transactions that
have importance for governance decisions as (1) asset specificity, (2)
disturbances/uncertainty, and (3) frequency).
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Although the transaction costs framework is often used to
explain the choice and structure of governance models, some
industries reflect a forced organizational change through
regulation from an integrated model to one that looks to
markets to supply necessary goods.45 The electric utility
industry reflects just one such forced organizational change.
During restructuring, electric utilities were forced to move
from a “make” to a “make and buy” organizational model. This
government-mandated reorganization can be understood
within transaction cost parlance as an acceptance of higher
transaction costs in an effort to achieve greater competition
and stifle monopolistic harms.46
As economists have noted, the transaction cost perspective
is “so intuitively appealing and so consistent with the historical
evolution of the electric power industry” that it has been the
focus of considerable analysis.47 Economists like Paul Joskow
devoted a significant amount of attention to the study of the
transaction cost perspective’s impacts on the electric utility
industry, focusing not on why the choice to reorganize was
made, but on the optimal segments of the industry to
reorganize.48 Joskow analyzed the impact of vertical
integration (and lack thereof) by engaging in empirical studies
of contracts between coal mines and utilities49 and by
evaluating the impact of incentives on the industry.50 Jean
45. Peter G. Klein, The Make-or-Buy Decision: Lessons from Empirical
Studies, in HANDBOOK OF NEW INSTITUTIONAL ECONOMICS 435 (Claude Ménard &
Mary M. Shirley eds., 2008).
46. Paul L. Joskow, Regulatory Failure, Regulatory Reform, and Structural
Change in the Electrical Power Industry, 1989 BROOKING PAPERS ON ECON.
ACTIVITY (MICROECONOMICS) 125.
47. See, e.g., Crocker & Masten, supra note 43; Joskow, supra note 44, at 96.
48. See, e.g., PAUL L. JOSKOW & RICHARD SCHMALENSEE, MARKETS FOR
POWER: AN ANALYSIS OF ELECTRIC UTILITY DEREGULATION (1983); PAUL L.
JOSKOW, REGULATION AND DEREGULATION AFTER 25 YEARS: LESSONS LEARNED
FOR RESEARCH IN INDUSTRIAL ORGANIZATION 28 (2005) [hereinafter JOSKOW,
LESSONS
LEARNED],
http://econweb.tamu.edu/puller/Econ649Docs/Joskow_
LessonsLearned.pdf [https://perma.cc/9K9Y-V3RU]; see also George J. Stigler &
Claire Friedland, What Can the Regulators Regulate: The Case of Electricity, 5
J.L. & ECON. 1, (1962); Kira R. Fabrizio, Institutions, Capabilities, and Contracts:
Make or Buy in the Electric Utility Industry, 23 ORG. SCI. 1264 (2012).
49. See, e.g., Paul L. Joskow, Vertical Integration and Long-term Contracts:
The Case of Coal—Burning Electric Generating Plants, 1 J.L. ECON. & ORG. 33
(1985).
50. See, e.g., JOSKOW, LESSONS LEARNED, supra note 48, at 28; (“The evolving
of deregulated wholesale power markets, with organized auction markets for
power and network support services, supported by regulated monopoly
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Tirole became another leading economist to apply the theory of
the firm to regulated firms like electric utilities,
telecommunications, and other networked industries—work
that earned him the 2014 Nobel Prize in Economics.51
Viewing the electric industry as a “firm” in the economic
sense allows us to better understand the constraints on the
relevant entities in their quest to provide the nation with a
reliable and cost-effective electric grid. As others have
indicated,
the transformation of these important regulated industries
as a consequence of restructuring, deregulation and
regulatory reform has turned these industries into among
the best laboratories for understanding the behavior and
performance of imperfectly competitive markets and many
of the central questions in industrial organization.52
Furthermore, this approach may be consistent with
Coase’s definition of the firm as “the system of relationships
which comes into existence when the direction of resources is
dependent on an entrepreneur (as opposed to price signals).”53
This Part describes the evolution of the utility from a
vertically integrated “make” firm to a “make and buy”
restructured firm, one much more dependent on outside
markets and third-parties for the provision of its reliability
services. Since this is a forced change in the utility model, this
Article does not rehash whether restructuring is meeting the
high hopes of its proponents. Instead, its focus is on
demonstrating the implications of a move to “make and buy”
for reliability resources. In so doing, the industrial organization
lens is used to help identify the attendant transaction costs
associated with the move to incorporate external reliability
transmission and system operations infrastructures, are emerging as another
fruitful area for studying mainstream issues in industrial organization.”).
51. ROYAL SWEDISH ACAD. OF SCIS., JEAN TIROLE: MARKET POWER AND
REGULATION (2014), http://www.ecgi.org/documents/sciback_ek_en_14.pdf [https://
perma.cc/55GJ-G49R]. A demonstration of the separation of ownership and
control with respect to reliability does not require the level of sophistication of
incentive theory regulation, but can be served by the more basic transaction cost
economic theories.
52. JOSKOW, LESSONS LEARNED, supra note 48, at 24–25.
53. Coase, supra note 37, at 393; see also id. at 392 (defining
entrepreneurship as the person who directs production within a firm instead of
allowing price movements to direct production).
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resource suppliers.
A. Pre-Restructuring “Make” Utilities
The original electric utility organizational structure began
as a “make” organizational model. Utilities’ responsibility over
reliability of the grid stems from their role as public utilities.
Electric utilities have been around for over one hundred
years,54 with the Supreme Court’s important decision, Munn v.
Illinois, opening the floodgates of state regulation of utilities
that are “clothed [in the] public interest.”55 Entities that
provide an essential public service, like electricity, can often
capture certain efficiencies. For instance, it would be inefficient
for there to be three sets of competing transmission lines that
run alongside each other when one is all that is needed.
Economists describe this situation as a natural monopoly,
where one firm can “naturally” produce its goods at lower costs
than others who are eventually priced out of the market.56
Capturing these efficiencies through one firm, however,
creates a monopoly and a vulnerable end user, where the owner
of the one transmission line could charge extremely high prices
to users of the line. Courts have struggled to find a regulatory
balance between efficiency and consumer protection.57 To reap
the benefits of efficiency while still protecting the public,
jurisprudence developed that envisioned an implicit “regulatory
compact” between the utility and the state, where utilities were
granted an exclusive service area with regulated rates that
provided more earnings stability than if they were in a
nonregulated market.58 In exchange, the utilities accepted a
54. Samuel Insull consolidated his company with twenty other utilities into
“Commonwealth Edison” in 1907. Emergence of Electrical Utilities in America,
NAT’L MUSEUM OF AM. HISTORY, http://americanhistory.si.edu/powering/
past/h1main.htm [https://perma.cc/GHU3-FTN7].
55. 94 U.S. 113, 126 (1877).
56. FRED BOSSELMAN, ET AL., ENERGY, ECONOMICS AND THE ENVIRONMENT
53 (3d ed. 2010) (citing William W. Sharkey, The Economic Theory of Natural
Monopoly (1983) (“[A] natural monopoly exists where a single firm is able to
provide a good or service to a market at a lower average cost than two or more
firms because of economies of scale or other network economies.”).
57. See, e.g., Proprietors of the Charles River Bridge v. Proprietors of the
Warren Bridge, 36 U.S. 420 (1837); Munn, 94 U.S. 113.
58. Jersey Cent. Power & Light v. FERC, 810 F.2d 1169, 1189 (D.C. Cir.
1987).
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universal “duty to serve”59 all customers within their service
area (i.e., nondiscriminatory service), and consumers received
protection from monopoly pricing. Implicit in this duty to serve
is a responsibility to provide the public with a reliable source of
electricity. For decades, utilities have cooperated with one
another to ensure that the bulk-power system60 is operated
within tight voltage, frequency, and stability limits. For
instance, utilities have established control areas to manage the
grid, developed common operating standards, assisted one
another with storm recovery, and undertaken other measures
to keep power flowing to distribution facilities.61 This has
helped the bulk-power system remain stable, so it can perform
its transmission function and instantaneously balance electric
supply with demand, while simultaneously protecting the
generation and transmission equipment.62
Imposing a duty to serve on electric utilities made sense
for practical reasons as well. For a hundred years, reliability of
the electric grid was handled primarily “in house” by a
vertically integrated utility.63 This utility controlled all three
components of the electric grid: generation, transmission, and
distribution facilities.64 The utility provided electricity for
ratepayers within a state-defined service territory, owning the
assets that provided these services and obtaining rate-based
compensation for them.65 These utilities functioned under a
regulated cost of service model where their investments in
59. See Jim Rossi, The Common Law “Duty to Serve” and Protection of
Consumers in an Age of Competitive Retail Public Utility Restructuring, 51 VAND.
L. REV. 1233, 1238 (1998) (“The duty to serve is richly steeped in the common law
and in the history of American industry.”).
60. The bulk-power system consists of generating units, transmission lines
(generally those 100 kilovolts (kV) and above), and substations and controls.
These facilities operate as an interstate grid subject to exclusive federal
regulation for the purpose of ensuring Bulk-Power System reliability and do not
include facilities used in the local distribution of electric energy, which remain
within state jurisdiction. Amicus Curiae Brief of Edison Electric Institute et al. at
12, Waldon v. Arizona, No. 3:13-cv-02086-H-KSC (Aug. 29, 2014),
http://appanet.files.cms-plus.com/PDFs/2014-08-29_(Dkt_22-2)_ACB_of_EEI,_
APPA,_NRECA,_and_EPSA.PDF [https://perma.cc/X6ZF-EWXE].
61. See THE REGULATORY ASSISTANCE PROJECT, ELECTRICITY REGULATION IN
THE US: A GUIDE 17–18 (2011) [hereinafter RAP ELECTRICITY REGULATION].
62. Id.
63. See MASS. INST. OF TECH., MIT STUDY ON THE FUTURE OF THE ELECTRIC
GRID
176–79,
https://mitei.mit.edu/system/files/Electric_Grid_8_Utility_
Regulation.pdf [https://perma.cc/Q8LH-R8CC].
64. Id.
65. See id.
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generation, transmission, and distribution facilities were
judged by state public utility commissions (PUCs) for their
prudence, with corresponding rate increases for qualifying
investments.66 Utilities would make a determination about
what assets were necessary for the grid based in part on
reliability considerations,67 and their job was made easier by
the centralized ownership and control of all the assets.68 This
complete integration by the utilities exemplifies the “make”
organizational model.
B. Post-Restructuring “Make and Buy” Utilities
Restructuring has forced many utilities to change from a
“make” organizational model to a “make and buy”
organizational model for energy resources, looking to external
sources for significant amounts of both generation and
reliability resources, while still relying on their internal firm
structure for some of their electricity needs.69 In 1996, the
Federal Energy Regulatory Commission (FERC) issued Order
888, requiring functional “unbundling” of the industry and
requiring investor-owned utilities (IOUs) to separate their
operation and access of their transmission assets from their
generation assets.70 All investor-owned utilities have complied
with FERC’s unbundling requirements, and many states went
See id. at 176–79.
See, e.g., THE REGULATORY ASSISTANCE PROJECT, BEST PRACTICES IN
ELECTRIC UTILITY INTEGRATED RESOURCE PLANNING (2013).
68. Similarly, the responsibility for coordinating operations between
generating plants and transmission systems traditionally was assigned to the
utility transmission system operators and system planners. Robert J. Michaels,
Vertical Integration and the Restructuring of the Electric Industry 15 (Sept. 2004)
(working
paper),
http://www.business.fullerton.edu/economics/rmichaels/
workingPapers/040921%20VI%20complete.pdf
[https://perma.cc/45ET-VEQY];
JAMES F. ELLISON ET AL., SANDIA NAT’L LAB., PROJECT REPORT: A SURVEY OF
OPERATING RESERVE MARKETS IN U.S. ISO/RTO-MANAGED ELECTRIC ENERGY
REGIONS (2012), http://www.sandia.gov/ess/publications/SAND2012_1000.pdf
[https://perma.cc/3BF6-GT4T].
69. For this reason, much of the industrial organization literature on the
relative merits of internal or external organization of a firm are inapposite here.
The utility firms did not have a choice. In about two-thirds of the United States,
these resources are obtained in organized competitive markets run by RTOs/ISOs.
PJM as an RTO, PJM INSIDE LINES (Nov. 23, 2015), http://insidelines.pjm.com/
pjm-as-an-rto/ [https://perma.cc/KZ5J-PQ64].
70. FERC Order 888, supra note 30. Order 888 also mandated open access to
transmission lines in an effort to allow competitive generators a chance to
compete against incumbent utilities. Id.
66.
67.
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even further in actually divesting ownership of their generation
assets.71 From 1997-2000, for instance, IOUs divested 22% of
U.S. generation capacity.72 States that have embraced retail
competition by requiring IOUs to separate their transmission
and distribution units from those providing retail electricity
also require divestiture as a precondition to their retail
markets.73 As a result, this restructuring transformation
resulted in significant divestiture of utility ownership over
generation assets while maintaining continued utility control
over transmission assets.74 Today, only a small fraction of the
3,000 utilities still perform all three functions—generation,
transmission, and distribution.75
Restructuring, and utilities’ subsequent divestiture of their
generation assets, has led nonintegrated utilities to become
more reliant on external resources to satisfy their duty to
serve. An example can be found in reliability resources used to
balance for unforeseen differentials between supply and
demand. A power system must operate within a narrow
frequency range to avoid system collapse.76 “These balancing
services are an important form of ancillary service for power
systems, generally referred to as operating reserve[s].”77 The
electric power grid must have minimum levels of operating
reserves (readily available generating capacity and/or
71. See, e.g., Texas, Connecticut, Maine, New Hampshire. U.S. ENERGY INFO.
ADMIN., DOE/EIA-0562(00), THE CHANGING STRUCTURE OF THE ELECTRIC POWER
INDUSTRY 2000: AN UPDATE 106 (2000), http://webapp1.dlib.indiana.edu/
virtual_disk_library/index.cgi/4265704/FID1578/pdf/electric/056200.pdf
[https://
perma.cc/H4ZU-AHS4]; see also Rachel Platis, The Difference Between Your
Energy Provider and Utility Company, GREEN MOUNTAIN ENERGY BLOG (May 21,
2015),
https://www.greenmountainenergy.com/2015/05/the-difference-betweenyour-energy-provider-utility-company/ [https://perma.cc/UHU6-E6J9].
72. Id. See also Jun Ishii & Jingming Yan, Does Divestiture Crowd Out New
Investment? The “Make or Buy” Decision in the U.S. Electricity Generation
Industry, 38 RAND J. ECON. 185 (2007) (evaluating the effectiveness of divestiture
for encouraging greater nonutility investment).
73. Industry Overview, TEXAS ENERGY EFFICIENCY, www.texasefficiency.com/
index.php/about/industry-overview [https://perma.cc/XJ9P-BPKG]; U.S. ENERGY
INFO. ADMIN., supra note 71.
74. See James B. Bushnell & Catherine Wofram, Ownership Change,
Incentives and Plant Efficiency: The Divestiture of U.S. Electric Generation Plants,
(Ctr. for the Study of Energy Markets, Working Paper No. 140, 2005); John
Kwoka et al., Divestiture Policy and Operating Efficiency in U.S. Electric Power
Distribution, 38 J. REG. ECON. 86 (2010).
75. JOHN F. ELLISON ET AL., supra note 68.
76. Id. at 9 (noting that in North America, for example, the nominal
(targeted) value for frequency is set at 60 Hz).
77. Id. at 9.
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distributed resources) to ensure a reliable supply of electricity.
Some of these operating reserves are provided by generation
plants that perform double duty, functioning as both electricity
and operating reserves.78 But some of these operating reserves
are provided by peaker plants—small, single cycle natural gas
plants, which can be quickly put into service for contingencies
if another generator suddenly becomes unavailable or if
demand for electricity is higher than usual. These peakers are
inefficient reliability resources, often called upon for less than
10%, or a few hundred hours, of the year.79 Yet they have
remained an important source of operating reserves. The
Energy Information Administration indicated that 25% of all
capacity added in 2013 was in the form of natural gas-fired
peaker plants,80 with dozens of additional peaker units planned
to be built between 2015 and 2023.81
For years, utilities constructed their own peaker plants.82
78. See, e.g., TVA in Tennessee, TENN. VALLEY AUTH., https://www.tva.gov/
About-TVA/TVA-in-Tennessee [https://perma.cc/TJ4H-VT5X] (discussing the
Tennessee Valley Authority, which relies on natural gas combustion turbines and
pumped storage for balancing services).
79. “These peaking plants . . . typically burn natural gas or, relatively rarely,
petroleum. They’re expensive to operate and they consume fuel inefficiently, but
they can turn on or off quickly. They exist solely to make sure there are no
brownouts when everyone comes home on a hot summer day and switches on their
air conditioners all at once. Peaking plants are a crucial part of the electric grid,
though they might only run for 5 to 15 percent of the year. They’re a big part of
your electric bill too.” Jeff Guo, It’s Not Just How Much Electricity You Use. It’s
POST
(Oct.
24,
2014),
Also
When
You
Use
It,
WASH.
http://www.washingtonpost.com/news/storyline/wp/2014/10/24/its-not-just-howmuch-electricity-you-use-its-also-when-you-use-it/ [https://perma.cc/B856-TQNK]
(referencing U.S. Energy Information Administration’s hypothetical dispatch
curve, Electric Generator Dispatch Depends on System Demand and the Relative
Cost of Operation, U.S. ENERGY INFO. ADMIN. (Aug. 17, 2012), http://www.eia.gov/
todayinenergy/detail.cfm?id=7590 [https://perma.cc/73GQ-5EB6]).
80. Half of Power Plant Capacity Additions in 2013 Came from Natural Gas,
U.S. ENERGY INFO. ADMIN.: TODAY IN ENERGY (Apr. 8, 2014), http://www.eia.gov/
todayinenergy/detail.cfm?id=15751 [https://perma.cc/RLR5-PSJ3] (noting that half
of all natural gas capacity added in 2013 was in the form of combustion turbine
peaker plants, thus 25% of all capacity added in 2013 was natural-gas fired
peaker plants).
81. U.S. ENERGY INFO. ADMIN., Electric Power Monthly with Data for
September 2015, tbl 6.5: Planned U.S. Electric Generating Unit Additions (2015),
http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_6_05
[https://perma.cc/AGJ2-DP3B] (based on a substantial number of combustion
turbines of less than 100 megawatts planned).
82. CHET LYONS, ENERGY STRATEGIES GRP., GUIDE TO PROCUREMENT OF
FLEXIBLE PEAKING CAPACITY: ENERGY STORAGE OR COMBUSTION TURBINES? 13
(2014). There is wide variation in terms of utility ownership of generation assets.
Evaluating self-generation data demonstrates that there is a large range between
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But as the industry restructured, the utilities needed to look to
a variety of external resources to satisfy their reliability
needs.83 This came primarily in the form of outsourcing its
peaker reliability resources to private “merchant” generators
and maintaining control through contractual commitments.84
Today, most restructured utilities only own a portion of their
peaker plants. For instance, of the twenty-four natural gasfired peaker units within San Diego Gas & Electric’s (SDG&E)
service area, California’s utility only owns three.85 In response
to reliability concerns, SDG&E recently chose to enter into a
power purchase agreement with an external merchant
generator, NRG, for a 500 megawatt five-unit natural gas
peaking plant in lieu of constructing one itself.86 Similarly,
Southern California Edison owns only five peakers within its
service area.87
Although there remains a wide range in utility ownership
utilities. Consultants found that utilities like Con Ed in New York generated only
9% of the electricity they delivered, while Xcel Energy generated 67% of the
electricity it delivered. Josh Lutton & Matthew Gallery, Utility Regulation and
the Nobel Prize, WOODLAWN ASSOCIATES (November 11, 2014), http://www.
woodlawnassociates.com/utility-regulation-nobel-prize/
[https://perma.cc/V8G2SZYB].
83. Some companies own generation in excess of their own loads, others are
purchasing some power at all times, and still others are operating units of holding
companies that control several utilities. There are a few unintegrated utilities
that only generate for wholesale sales or only distribute purchased power.
84. A merchant generator is sometimes referred to as an Independent Power
Producer (IPP), an entity “that owns or operates facilities for the generation of
electricity for use primarily by the public, and that is not an electric utility.”
Glossary, U.S. ENERGY INFO. ADMIN., https://www.eia.gov/tools/glossary/
index.cfm?id=I [https://perma.cc/N35A-U5LY]. For instance, The Carlsbad Energy
Center LLC, an indirect wholly owned subsidiary of NRG Energy, Inc. is building
a 500 megawatt natural gas combined cycle facility for San Diego Gas & Electric
“to meet ‘the local capacity reliability’ need.” Decision Conditionally Approving
San Diego Gas & Electric Company’s Application for Authority to Enter into
Purchase Power Tolling Agreement with Carlsbad Energy Center, LLC, No. 1501-051 (Cal. Pub. Utils. Comm’n May 29, 2015), http://docs.cpuc.ca.gov/
SearchRes.aspx?DocFormat=ALL&DocID=152058431
[https://perma.cc/86HPJAZQ].
85. SDG&E, PEAKER PLANTS FACT SHEET (2014), http://www.sdge.com/
sites/default/files/newsroom/factsheets/SDG%26E%20Peakers%20Fact%20Sheet_
0.pdf [https://perma.cc/C9C5-H97E] (Miramar Energy Facility (Miramar I and
Miramar II) and Cuyamaca Peak Energy Plant).
86. See supra note 84.
87. 9 S. CAL. EDISON, 2015 GENERAL RATE CASE BEFORE THE PUBLIC
UTILITIES COMMISSION OF THE STATE OF CALIFORNIA 4 (2013),
http://www3.sce.com/sscc/law/dis/dbattach5e.nsf/0/8767C07C6A42209888257C210
080EBE3/$FILE/SCE-02%20Vol.%2009.pdf [https://perma.cc/9YRC-J9TG].
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over generation assets,88 restructuring has resulted in a
significant decrease in the amount of reliability assets owned
by the utilities. Importantly, relationships in a “make and buy”
scenario are the product of external contracts, and the
procurement of reliability resources is no exception. The
external supplier and the utility enter into a mutually
beneficial contract to minimize transactions costs, which, with
respect to reliability resources, could include information,
bargaining, coordination, and enforcement costs. Contracting
for these resources was made relatively simple by the fact that
private, external suppliers were providing reliability resources
for one purpose only—to serve the utility—and with an
expectation to be compensated for this product. As will be
described below, this is in contrast to the ownership model
associated with customer-owned distributed reliability
resources.
In short, the historical evolution of the utility with respect
to reliability and transaction costs can be viewed in stages.
Utilities moved from a “make” to “make and buy” model as they
sought external reliability sources developed to serve the
utility. The next Part describes the continuing evolution to a
“make and buy plus” organizational model driven by customerowned reliability resources.
II. SEPARATION OF OWNERSHIP AND CONTROL OF RELIABILITY
RESOURCES
On the heels of the evolution to a “make and buy” model
comes the changing nature of resources available to the utility
as part of its reliability toolkit.89 As energy storage and DR
become essential to maintaining reliability challenges, their
availability is prompting the continued evolution from the
“make and buy” model to one that I am calling “make and buy
plus.” This term is a more accurate characterization of the
current model, one where the “plus” reflects those utilities that
are now buying not only from noncustomer resources, but also
from customer-owned resources. The utility that used to be
88. Evaluating self-generation data demonstrates that there is a large range
between utilities. Consultants found that utilities like Con Ed in New York
generated only 9% of the electricity they delivered while Xcel Energy generated
67% of the electricity it delivered. Lutton & Gallery, supra note 82.
89. See supra note 8.
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vertically integrated has evolved from one that needed to be
dependent on other firms along the production chain (e.g.,
merchant power plants) to one that now also needs to be
cognizant, if not dependent, on individual customers’ selfserving reliability services. This continuing evolution naturally
begs the question: Are transaction cost theories still relevant?
In one sense, the relationship that exists between utilities
and their customers for reliability resources does not qualify as
a typical “transaction” between a buyer and seller. First,
although customers and utilities sometimes participate in
typical external transactions (e.g., a utility procuring excess
solar generation from storage or third party aggregators
transacting with customers and utilities), some customers
engage in their own self-generation without any intention of
engaging in a transaction with the utility. Second, reliability’s
characterization as a public good further complicates squeezing
it into such a box.90 In some respects, reliability per se is not
actually being purchased and sold,91 but in other respects,
selling the use of storage devices or the opportunity cost of
using electricity can be seen as an external transaction more
akin to traditional market transactions. Third, unlike in
traditional transaction cost economics, where pricing and
profits are the primary driver behind firm investments, the
driving force behind external customer investments in
reliability resources may be much more diverse. In this way,
customer ownership may be more akin to government
ownership in that those who own private, nonutility reliability
resources often have objectives other than profit maximization.
These objectives may include reductions of environmental
pollutants and greenhouse gases, electricity independence, and
community support.92 If nothing else, it is clear that the
90. See, e.g., Malcom Abbott, Is the Security of Electricity Supply a Public
Good?, 14 ELEC. J. 31, 33 (2001), http://www.sciencedirect.com/science/
article/pii/S104061900100224X [https://perma.cc/Z56F-XLN2]. Public goods are
generally regarded as having two key characteristics: nonrivalry and
nonexcludability.
91. For instance, reliability is sometimes referred to as an “attribute[] of the
procurement.” Crocker & Mastern, supra note 43, at 11.
92. Jean-Jacques Laffont & Jean Tirole, Privatization and Incentives, 7 J.L.
ECON. & ORG. 84, 90 (1991). See id. for a taxonomy of ownership. This is not to
say there is no profit maximization objective, only that it is not as singular of an
objective for nonutility customer owners of reliability resources. On the contrary,
many nonutility investors in DERs are motivated by cost savings in electricity
bills. With regard to these alternative goals, public utilities are placing a growing
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application of these theories is complicated by the complex
nature of reliability: serving as both a public good and a service
that is capable of acquisition on the market, as well as the
unique nature of a customer turned supplier in the production
chain of a networked industry.
On the other hand, one could characterize the relationship
between utilities and customers as just an example of an
extended “buy” organizational structure, replete with
additional transaction costs beyond those incurred between the
utility and their external merchant generators. Even if the
relationship that exists between the utility and the customer is
not always a true transaction, there are clearly transaction
costs that attend such a mutually-dependent relationship.93
Scholars who have assessed the dependency of the value of
resources on particular parties have noted that “[d]ependence
does not typically stop at the boundaries of groups of
cooperating people in what is conventionally called a ‘firm.’ Not
to be ignored are some customers of the firm’s products . . .
mutual dependence creates a coalition with contractual
relationships similar to those ‘within’ a conventional ‘firm.’”94
Within transaction cost economics lies the related theory of
separation of ownership and control. In fact, some scholars
have integrated the Coasian view of the firm with the
separation of ownership and control.95 Although the concept
originally had been articulated by Adam Smith,96 the modern
theory is often attributed to Bearle and Means and their initial
recognition of the growth of shareholders (the “owners”) within
a private, regulated firm and the potential for divergent
focus on corporate social responsibility (CSR) goals and related reputational
effects on stock. See Vivek Ghosal & D. Daniel Sokol, Compliance, Detection, and
Mergers and Acquisitions, 34 MANAGERIAL & DECISION ECON. 514 (2013).
93. For a more in depth discussion of some of these transaction costs, see
infra Section II.B.
94. Armen Alchian & Susan Woodward, The Firm Is Dead; Long Live the
Firm, A Review of Oliver E. Williamson’s The Economic Institutions of Capitalism,
26 J. ECON. LITERATURE 65, 73 (1988) (discussing incomplete integration and the
desire of customers to serve on the board of directors).
95. Patrick Bolton & David Scharfstein, Corporate Finance, the Theory of the
Firm, and Organizations, 12 J. ECON. PERSP. 95, 96 (1998) (“[T]he time has come
to begin to integrate the Coasian view of the firm—which is concerned with
interactions between owner-managers—and the Berle and Means perspective—
which emphasizes the separation of ownership and control in most corporations.”).
96. Stephen Marks, The Separation of Ownership and Control, in 1998
ENCYCLOPEDIA OF LAW AND ECONOMICS 692–93 (1999) (citing ADAM SMITH, THE
WEALTH OF NATIONS (1776)).
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interests from those who are managing the corporation (the
“control”).97
The separation of ownership and control theories is not a
perfect fit to explain what is happening in the utility
industry.98 The concept is commonly used to explain the
dynamic that occurs between two entities in a single, private,
regulated firm.99 Some even suggest the concept requires two
key components: (1) a manager to make management decisions
for the firm; and (2) an owner with claims to profits.100 These
components do not translate well when discussing the
relationship between a utility and a customer supplying
reliability resources.101 Similarly, many of the mechanisms
that have been proposed to adjust for the implications of
separating ownership and control are inapplicable where the
ownership and control are separated into different “firms.”102
Nevertheless, as Joskow did, I find the theories behind the
separation of ownership and control so “intuitively
appealing”103 to provide a framework for assessing the
relationship between utilities and customers at different levels
on the production chain.104
97. Id. (citing ADOLF A. BEARLE & GARDINER C. MEANS, THE MODERN
CORPORATION AND PRIVATE PROPERTY (1932)).
98. Perfect fits are not necessary to illuminate a concept. Coase noted that the
relation between employer and employee and the firm is not identical, but
“sufficiently close” for “appraising the worth of the economic concept.” Coase,
supra note 37, at 403 n.3.
99. Marks, supra note 96, at 693.
100. Id. Others suggest there merely needs to be a payment for goods and
services. See, e.g., INT’L ENERGY AGENCY, MIND THE GAP: QUANTIFYING
PRINCIPAL-AGENT PROBLEMS IN ENERGY EFFICIENCY 11 (2007).
101. Additionally, customer ownership of reliability resources, though private,
would not be classified as a regulated private firm, subject to regulations such as
antitrust, cost of service, etc.
102. Marks, supra note 96, at 698 (noting six mechanisms, including direct
managerial financial incentives, corporate governance oversight, and shareholder
empowerment).
103. See Joskow, supra note 44, at 96.
104. We could also flip the “make-or-buy” analysis on its head by envisioning
the customer as a “firm.” Until recently, the customer had been required to “buy”
reliability services. Now that such services are becoming more commercially
available with regulatory approval, some customers are engaging in some form of
analysis about whether it is more beneficial to make, buy, or “make and buy,” as
many are doing. The transaction cost literature expects a firm’s make-or-buy
decision to be influenced by its cost of production relative to other suppliers.
Fabrizio, supra note 48, at 1268. While cost savings of self-generating reliability is
certainly one factor driving the decision of the customer to “make” instead of “buy”
the reliability services, it is merely one of many. Future research may be able to
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Applying these concepts to reliability is also consistent
with prior applications, particularly those that characterized
the separation of ownership and control as an agency
problem.105 For example, scholars have stretched the concept
beyond a literal definition to apply agency theories to
investments in energy efficiency.106 Similarly, in the regulatory
context, its application is not limited to situations where there
is an explicit contract between principal and actor. For
instance, separation of ownership and control theories have
also been applied to the relationship between the utility (agent)
and the regulators (principal) by relying on the implied
regulatory contract.107 This is also supported by those who
understand a modern firm with reference to the “manager” and
the “risk bearer.”108 Under this parlance, those in the utility
who manage the reliability of the grid play the role of the
“manager” while customers play the role of the “risk bearer,”
not with respect to profits, but with respect to power outages. If
a utility fails to maintain reliability of the grid, the customers
are the ones who bear the risk of losing electricity. Although
the utility might historically be viewed as the agent (hired by
the customer to provide a service) and the customers as the
principal (paying for electricity service), there are other
explore the drivers behind customer-generated reliability from a transaction cost
perspective.
105. Michael Jensen & William Meckling, Theory of the Firm: Managerial
Behavior, Agency Costs and Ownership Structure, J. FIN. ECON. 305 (1976);
Principal-agent theory has been applied to a variety of situations, often where one
(the principal) hires another (the agent) for performance. See infra notes 106–109
for other applications. INT’L ENERGY AGENCY, supra note 100 (describing
principal-agent problems that may arise “when two parties engaged in a contract
have different goals and different levels of information”); Carl Blumstein,
Program Evaluation and Incentives for Administrators of Energy-Efficiency
Programs: Can Evaluation Solve the Principal/Agent Problem? 38 ENERGY POL’Y
6232 (2010).
106. INT’L ENERGY AGENCY, supra note 100, at 21 (citations omitted); SCOTT
MURTISHAW & JAYANT SATHAYE, QUANTIFYING THE EFFECT OF THE PRINCIPALAGENT PROBLEM ON U.S. RESIDENTIAL ENERGY USE (2008), http://aceee.org/files/
proceedings/2008/data/papers/9_59.pdf [https://perma.cc/87X8-TQ2X] (providing
quantitative assessments of principal-agent problems with respect to energy
efficiency); Kenneth Gillingham et al., Split Incentives in Household Energy
Consumption, 33 ENERGY J. 37 (2012).
107. Michael Russo, Power Plays: Regulation, Diversification, and Backward
Integration in the Electric Utility Industry, 13 STRATEGIC MGMT. J. 13, 16 (1992)
(applying themes of asymmetric information and divergent interests to these two
entities).
108. Eugene F. Fama, Agency Problems and the Theory of the Firm, 88 J. POL.
ECON. 288, 290–91 (1980).
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variations of the principal-agent relationship that can exist
between the utility and the customer in light of reliability
services.109 As in other energy contexts, the relationships can
be characterized based on who selects, purchases, owns, and
controls the technology.110 Using a similar formulation, the
utility may act as the principal, paying for reliability services,
and the customer may be characterized as one of many agents
providing those reliability services. Just as controlling
manager-agents often possess more information than the
shareholder-principals, the controlling customer-agents may
possess more information than the utility-principal and control
the reliability resources.
This Part provides an affirmative answer to the question of
whether transaction cost theories are relevant to analyzing the
interaction of utilities and customers with respect to reliability
resources. First, it describes the evolution from a “make-andbuy” to a “make-and-buy plus” model for utilities with respect
to the reliability resources—energy storage and DR. It then
applies theories related to separation of ownership and control
to identify the additional transaction costs associated with the
utility’s management of the reliability of the grid in this new
governance model. The industrial organization lens serves as a
useful framework to analyze how to better the relationship
between utilities and customers in light of distributed
reliability.
A. Customer Ownership: “Make and Buy Plus”
The transaction costs associated with the restructured
vertical disintegration of the electric utility discussed supra
have been well documented.111 As others have noted, electricity
transactions are “plagued by bilateral dependence between the
generators and the utility company because of location
specificity, time specificity, and uncertainty.”112 This Article
extends the analysis from a utility that both “makes and buys”
reliability from external market players to one where the
109. See, e.g., INT’L ENERGY AGENCY, supra note 100, at 40–42 (describing four
possible principal-agent relationships that can exist with respect to landlord
tenants and energy efficiency).
110. Id. at 43.
111. See, e.g., Joskow, supra note 44; Crocker & Mastern, supra note 43; Russo,
supra note 107.
112. Fabrizio, supra note 48, at 1266.
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utility now “makes and buys” reliability from external market
players and customers. Although still a “make and buy,”
scenario, I am referring to this as “make and buy plus” to
account for the presence of the new organizational
arrangement that is developing between the utility and the
customers that are providing reliability resources.
This new organizational arrangement between the utility
and the customer is driven in large part by the increasing value
of reliability resources as demand for cleaner, renewable
energy grows. Public policies associated with environmental,
sustainability, and security concerns are driving the grid
towards cleaner sources of electricity generated from solar and
wind. Although renewable energy provides important
environmental benefits,113 it also poses significant reliability
challenges for the grid operators.114 These renewable energy
sources are intermittent, meaning they cannot be used as a
constant source of supply.115 Instead, we are limited to these
resources when the sun shines or the wind blows. This also
makes renewable energy nondispatchable, meaning grid
operators cannot call on them for assistance when needed to
meet unexpected peaks or help with quality control of the lines.
This addition of substantial amounts of intermittent
renewable energy has led to an increased focus on faster-acting
reliability resources. New reliability resources are needed that
can aid in the large “ramps” that result from large swings in
electricity supply as the sun rises and sets and the winds stop
and go. The traditional peaker plants that ordinarily assist
with addressing traditional ramps are not as effective at
addressing these large ramps, effectively leaving a reliability
gap.116
113. Benefits
of
Renewable
Energy,
NEXTERA
ENERGY
RES.,
http://www.nexteraenergyresources.com/content/environment/benefits.shtml
[https://perma.cc/FW8G-9KUK] (noting both production benefits (reduced land use
impacts from mining and drilling) and combustion benefits (reduced criteria
pollutants like nitrogen dioxide, as well as reduced greenhouse gases)).
114. AM. PHYSICAL SOC’Y, INTEGRATING RENEWABLE ELECTRICITY ON THE
GRID
2
(2010),
https://www.aps.org/policy/reports/popa-reports/upload/
integratingelec.pdf [https://perma.cc/QM2T-6YWQ]; Vijay Vittal, The Impact of
Renewable Resources on the Performance and Reliability of the Electricity Grid, 40
BRIDGE 5 (2010), https://www.nae.edu/File.aspx?id=18585 [https://perma.cc/E4UAALNX].
115. See Jason Rugolo & Michael J. Aziz, Electricity Storage for Intermittent
Renewable Sources, 5 ENERGY & ENVTL. SCI. 7151 (2012).
116. But see Herman Trabish, A User’s Guide to Natural Gas Power Plants,
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In response to these operational challenges associated with
renewable energy, a new generation of resources has developed
to address reliability. This analysis focuses on two of them—
energy storage and DR. Such resources are able to respond
more quickly and accurately to calls from the grid operators
than peaker plants and are rapidly increasing in value.117
Energy storage, for instance, is four times more flexible,
responds far more quickly (peakers respond in 10 minutes
while storage responds in less than one second), and is more
accurate in following variable load.118 Analysts are assessing
the ability of energy storage to both replace reliability-oriented
peaker power plants119 and defer expensive reliability-related
transmission system upgrades.120 Energy storage projects
provide services that transcend the typical divisions of the
energy industry, performing at least twenty different
operational services across all components of the energy
system.121
Importantly, these resources are increasingly owned and
controlled by various entities other than utilities, including
“merchant” distributed generators, merchant energy storage
owners, DR aggregators, and even individual customers.122
Energy storage, for instance, can be interconnected to the grid
UTILITYDIVE (May 6, 2014), http://www.utilitydive.com/news/a-users-guide-tonatural-gas-power-plants/259104/ [https://perma.cc/Q9EE-VH57] (noting the
ability of new aero-derivative peaker turbines like GE’s LMS100 or Alstom’s GT11
to ramp up within seconds).
117. See supra note 8.
118. CAL. ENERGY STORAGE ALL., ENERGY STORAGE COST EFFECTIVENESS 33
(2013), http://www.storagealliance.org/sites/default/files/Presentations/Energy%20
Storage%20Cost%20Effectiveness%202013-09-23%20FINAL.pdf [https://perma.cc/
JUU9-63PC].
119. LYONS, supra note 82.
120. MUSHIN ABDURRAHMAN ET AL., ENERGY STORAGE AS A TRANSMISSION
ASSET
2
(2012),
https://www.pjm.com/~/media/markets-ops/advanced-techpilots/xtreme-power-storage-as-transmission.ashx [https://perma.cc/BH2W-48DL].
121. GREENTECH LEADERSHIP GRP., MORE THAN SMART: A FRAMEWORK TO
MAKE THE DISTRIBUTION GRID MORE OPEN, EFFECTIVE, AND RESILIENT 20 (2014),
http://authors.library.caltech.edu/48575/1/More-Than-Smart-Report-by-GTLGand-Caltech.pdf [https://perma.cc/U5QQ-8K6N]; see Stein, supra note 10, for a
description of how storage has the capacity to perform generation, transmission,
and distribution functions.
122. See, e.g., Merchant Electricity Storage, ENERGY STORAGE ASS’N,
http://energystorage.org/energy-storage/technology-applications/merchantelectricty-storage [https://perma.cc/X4JV-G6RD]; Demand Response Fact Sheet:
Aggregator Programs, PG&E, http://pge.com/includes/docs/pdfs/mybusiness/
energysavingsrebates/demandresponse/amp/fs_aggregatorprograms.pdf [https://
perma.cc/3WBF-VQ2S]. Discussed further in the remainder of Part II.
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at multiple locations—on the federally-regulated transmission
lines,123 on the state-regulated distribution lines,124 and at the
customer’s own place of use.125 Some of these resources fit the
more traditional mold of third-party development to serve the
public utility, but there also will be an increasing number of
private customer-owned reliability resources that continue to
develop.
Customer-owned reliability resources are developing
because customers lack the singular focus on profits that exists
for other private market players. Prompted by social
consciousness, cost savings, reliability, and loosening
regulatory restrictions, a number of customer-owned resources
are being developed purely to self-supply. This Part focuses on
these customer-owned reliability resources that are used on a
sub-federal level to aid in managing the distribution or
customer-sited electricity flows. Although such distributed
energy resources (DERs) often are defined as “behind-themeter”126 power generation and storage resources typically
located on an end-use customer’s premises and are operated for
the purpose of supplying all or a portion of the customer’s
electric load, this Article adopts a slightly broader definition.127
123. For example, Wisconsin Public Service partnered with American
Superconductor to install a Distributed-Superconducting Magnetic Energy
Storage System (D-SMES) on a 200-mile loop with stability issues, which
“provided the very short duration needed at roughly one tenth the cost and a
faster, less intrusive installation.” ABDURRAHMAN ET AL., supra note 120, at 3.
124. For example, Magnum Energy is in the process of developing a $1.5 billion
compressed energy storage project in Utah, fueled by electricity from a 2,100
megawatts wind farm in Wyoming to produce power for Southern California. See
Companies Propose $8 Billion Wind, Energy Storage Project to Power Los Angeles,
N. AM. WIND POWER (Sept. 23, 2014), http://www.nawindpower.com/
e107_plugins/content/content.php?content.13441 [https://perma.cc/2DQT-8EBY].
125. Battery Backup, SOLARCITY, http://www.solarcity.com/residential/backuppower-supply [https://perma.cc/63K6-YFXL].
126. The term “behind-the-meter” is meant to represent resources that are
generally not connected on the bulk or wholesale electric power system, but are
connected behind a customer’s retail access point (the meter). These resources
may be operating to serve the customer’s internal electric loads or may be
operating for the purpose of selling into the bulk electric power system. DNV GL
ENERGY, A REVIEW OF DISTRIBUTED ENERGY RESOURCES 1 (2014),
http://www.nyiso.com/public/webdocs/media_room/publications_presentations/Oth
er_Reports/Other_Reports/A_Review_of_Distributed_Energy_Resources_Septemb
er_2014.pdf [https://perma.cc/7CHR-FW96].
127. Id. This tracks New York’s approach to DER “to describe a wide variety of
distributed energy resources, including end-use energy efficiency, demand
response, distributed storage, and distributed generation. DER will principally be
located on customer premises, but may also be located on distribution system
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In this Article, DERs include technologies such as solar
photovoltaic (PV), combined heat and power (CHP) or
cogeneration systems, microgrids, wind turbines, micro
turbines, back-up generators, energy storage, and DR.128
Although the term DER includes both generation and
reliability resources, the focus of this analysis is on the
reliability DER resources—energy storage and DR.129 Unlike
peaker plants, which are reliability resources designed solely to
serve the utilities, this new generation of distributed reliability
resources are often created for the benefit of the individual
customer as opposed to the public at large.
These “self-providers” of reliability have the potential to
throw an extra chink in the reliability armor, rendering it
much more difficult for utilities to accurately plan for
reliability of a grid that is not only out of its control, but out of
its line of sight. As if maintaining reliability of the grid with
outsourced resources was not difficult enough, grid operators
now need to ensure the reliability of the grid in an era of selfsupply. As discussed below in Section B, these resources
increase the likelihood of divergent interests between the
customer and utility use of these resources, as well as the
likelihood that there will be inequalities of information
between the customer and the utility that may cause
difficulties in capturing their full value. If the multiple value
streams of these reliability resources can be captured, however,
these reliability resources have the potential to fortify the
reliability armor.
This Section addresses the important role energy storage
and DR play as new reliability resources and documents the
proliferation of new ownership models that have developed in
response.
1.
Energy Storage
The first reliability resource being purchased by nonutility
customers is energy storage. Energy storage in this context
refers not to the storage of primary fuels like natural gas, but
facilities.” Order Adopting Regulatory Policy Framework and Implementation
Plan, 14-M-0101, at 3 n.3 (N.Y. Pub. Serv. Comm’n Feb. 26, 2015).
128. DNV GL ENERGY, supra note 126, at 1.
129. These DERs generally are intended not to replace centralized resources,
but to supplement them. Id. at 1–3.
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the energy storage of previously generated electric energy
(potential, kinetic, chemical, or thermal energy) to be released
at a later time. FERC defines an energy storage asset as
property that is interconnected to the electrical grid and is
designed to receive electrical energy, to store such electrical
energy as another energy form, and to convert such energy
back to electricity and deliver such electricity for sale, or to
use such energy to provide reliability or economic benefits to
the grid.130
By eliminating the historical limitation of the grid
requiring instantaneous use, energy storage has the potential
to drastically alter the way the electricity grid functions.131
Even though the grid operators control reliability, this
Subsection demonstrates not only that significant amounts of
energy storage resources are outside of the ownership and
control of the utilities, but also that there is immense growth
potential of such customer ownership. The Department of
Energy reports there are 1,385 energy storage projects
currently operating worldwide.132 Some forms of energy
storage, such as pumped hydropower storage, have been the
historic face of bulk energy storage133 for over a hundred
130. Third-Party Provision of Ancillary Services; Accounting and Financial
Reporting for New Electric Storage Technologies, 144 FERC ¶ 61,056 at 112 (July
18, 2013); see also CAL. PUB. UTILS. COMM’N, ELECTRIC ENERGY STORAGE: AN
ASSESSMENT OF POTENTIAL BARRIERS AND OPPORTUNITIES 2–3 (2010) (defining
electric energy storage involving “a set of technologies capable of storing
previously generated electric energy and releasing that energy at a later time.
EES technologies may store electrical energy as potential, kinetic, chemical, or
thermal energy, and include various types of batteries, flywheels, electrochemical
capacitors, compressed air storage, thermal storage devices and pumped
hydroelectric power.”).
131. In fact, some utilities view energy storage as a “disruptive force.” PETER
KIND, EDISON ELEC. INST., DISRUPTIVE CHALLENGES: FINANCIAL IMPLICATIONS
AND STRATEGIC RESPONSES TO A CHANGING RETAIL ELECTRIC BUSINESS 3 (2013).
132. DEP’T. OF ENERGY, DOE GLOBAL ENERGY STORAGE DATABASE,
http://www.energystorageexchange.org/projects
[https://perma.cc/EUS5-YTX8]
[hereinafter GLOBAL ENERGY STORAGE DATABASE]. This database only captures
projects that users voluntarily register, which are then vetted through a thirdparty verification process.
133. Bulk energy “refers to the network of interconnected generation and
transmission lines, while the distribution system refers to the lower-voltage
generally radial lines that deliver electricity to the final customer.” NAT’L
RENEWABLE ENERGY LAB., BULK ELECTRIC POWER SYSTEMS: OPERATIONS AND
TRANSMISSION PLANNING 22-21 (2012), http://www.nrel.gov/docs/fy12osti/524094.pdf [https://perma.cc/AV5W-M9V8].
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years.134 But the world is bracing for the next generation of
bulk energy storage to address reliability, economic, efficiency,
and environmental issues plaguing the electric grid.135
Importantly, storage is no longer limited to the massive,
geographically constrained options of pumped storage or
compressed air energy storage. In addition to these large-scale
technologies, this next generation will expand to include some
combination of batteries, flywheels, fuel cells, and
superconducting magnets.136 As a result, these smaller scale
projects render individual ownership more plausible.
In fact, ownership of energy storage resources is quite
diffuse, with the majority of energy storage resources, almost
70%, being owned by nonutility customers.137 The Department
of Energy’s global database of grid-connected energy storage
reflects 580 projects across the United States.138 Of these
projects, 219 are customer owned,139 183 are utility owned,140
134. There are approximately 22 GW of PSH deployed in the United States
across forty sites, most of which was developed between 1970 and 1990. Pumped
Storage Provides Grid Reliability Even with Net Loss, U.S. ENERGY INFO. ADMIN.
(Jul. 8, 2013), http://www.eia.gov/todayinenergy/detail.cfm?id=11991 [https://
perma.cc/L2XY-C8R2]; PAUL DENHOLM, ET AL., NAT’L RENEWABLE ENERGY LAB.,
THE ROLE OF ENERGY STORAGE WITH RENEWABLE ENERGY GENERATION (2010),
http://www.nrel.gov/docs/fy10osti/47187.pdf [https://perma.cc/7TVP-9376].
135. Martin Rosenberg, Musk to Utilities: Brace Yourself, ENERGY TIMES (Jun.
8, 2015), http://tdworld.com/energy-times/musk-utilities-brace-yourself [https://
perma.cc/QV4E-VK24].
136. See Stein, supra note 10.
137. See infra notes 139–141.
138. GLOBAL ENERGY STORAGE DATABASE, supra note 132 (use dropdown filter
“United States”).
139. GLOBAL ENERGY STORAGE DATABASE, supra note 132 (use dropdown filter
“United States” and dropdown filter “Customer-Owned”).
140. GLOBAL ENERGY STORAGE DATABASE, supra note 132 (use dropdown filter
“United States” and dropdown filter “Utility-Owned”). Microgrids like the Pecan
Street Project would also fall into this category, owned by Austin Energy, as
would Consolidated Edison’s (a distribution utility) proposal with the New York
Public Utilities Commission to invest in batteries to defer transmission
investments. Pecan Street Project Inc. Energy Internet Demonstration, DOE
GLOBAL ENERGY STORAGE DATABASE, http://www.energystorageexchange.org/
projects/440 [https://perma.cc/73VE-LYAE] (last updated Oct. 17, 2013);
Katherine Tweed, Con Ed Looks to Batteries, Microgrids and Efficiency to Delay
TECH
MEDIA
(Jul.
17,
2014),
$1B
Substation
Build,
GREEN
http://www.greentechmedia.com/articles/read/con-ed-looks-to-batteriesmicrogrids-and-efficiency-to-delay-1b-substation
[https://perma.cc/9928-FG6T].
Investment in energy storage even has been mandated on utilities with the use of
settlement terms. In 2014, FERC and NERC allowed $9 million of a $12 million
settlement with Imperial Irrigation District to be offset with its investments in a
large scale battery energy storage project by December 31, 2016. Joel deJesus,
FERC Approved 12 Million Settlement for Reliability Standards, ENERGY &
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and 178 are third-party owned.141 Microgrids have been
developing for years, with an emphasis on being able to
“island” the community from the grid in times of need, an effort
that requires self-supplying reliability.142 On the corporate
side, private companies also have started to focus on their own
reliability. For example, Goldman Sachs has added thermal ice
storage in the basement of its commercial buildings in New
York.143
This growth of nonutility energy storage ownership is
being fueled by at least two key drivers. First, regulatory
initiatives incentivize nonutility ownership of storage,
particularly in California and New York. California passed the
first energy storage mandate in the country, requiring its three
large investor-owned utilities to procure 1,300 megawatts of
storage by 2016.144 Oregon has followed suit, passing an energy
ENVTL.
L.
ADVISER
(Aug.
13,
2014),
http://www.energy
environmentallawadviser.com/2014/08/13/ferc-approves-12-million-settlement-forreliability-standards-violations-of-imperian-irrigation-district/ [https://perma.cc/
G363-6LFU].
141. GLOBAL ENERGY STORAGE DATABASE, supra note 132 (use dropdown filter
“United States” and dropdown filter “Third-Party-Owned”). Third-party owned
projects would include those by independent power producers like advanced
pumped storage facilities and those owned by owners of renewable energy such as
wind farms that have paired storage in Hawaii and California. It can also include
projects like AES Energy Storage’s 100-megawatt “in-front-of-meter” battery
system in SCE’s West Los Angeles Basin region with the intent to use it “as both
generation and load, enabling more than twice the flexible range of a traditional
peaker plant on the same transmission infrastructure.” Auwahi Wind Farm, DOE
GLOBAL ENERGY STORAGE DATABASE, http://www.energystorageexchange.org/
projects/317 [https://perma.cc/PEE5-SJHZ] (last updated July 16, 2014); MID
Primus Power Wind Energy Storage Demonstration, DOE GLOBAL ENERGY
STORAGE
DATABASE,
http://www.energystorageexchange.org/projects/1467
[https://perma.cc/YH4L-JZKP] (last updated Nov. 7, 2014); AES to Help SCE Meet
Local Power Reliability with PPA for 100 MW of Energy Storage in California,
AES ENERGY STORAGE (Nov. 5, 2014), http://www.aesenergystorage.com/
2014/11/05/aes-help-sce-meet-local-power-reliability-20-year-power-purchaseagreement-energy-storage-california-new-facility-will-provide-100-mwinterconnected-storage-equivalent-200-mw/ [https://perma.cc/B459-HRSH].
142. Mike Munsel, U.S. Microgrid Capacity Will Exceed 1.8 GW by 2018,
GREEN TECH MEDIA (June 26, 2014), http://www.greentechmedia.com/articles/
read/US-Microgrid-Capacity-Will-Exceed-1.8-GW-by-2018 [https://perma.cc/Z8G8QP48].
143. Mark Drajem and Justin Doom, Goldman’s Icy Arbitrage Draws Interest to
Meet EPA Rule, BLOOMBERG (Aug. 1, 2014), http://www.bloomberg.com/news/
articles/2014-08-01/goldman-s-icy-arbitrage-draws-interest-to-meet-epa-rule
[https://perma.cc/UN2V-6VCN].
144. Order Instituting Rulemaking Pursuant to Assembly Bill 2514-2010-469,
R 10-12-007 (Cal. Pub. Utils. Comm’n Dec. 21, 2010).
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storage mandate.145 Notably, the California state law caps
utility ownership at 50%, mandating not only storage, but also
nonutility owned storage.146 California’s Self-Generation
Incentive Program provides another incentive for nonutility
owned storage, providing funding for at least half of the
underlying cost of qualifying customer-owned energy storage
projects.147 “This has played a critical role in boosting multimegawatt distributed, behind-the-meter battery deployments
from big players like Stem, Ice Energy and SolarCity-Tesla.”148
The New York Public Service Commission has also recently
issued an order adopting an implementation plan for its
distribution grid in accordance with Governor Cuomo’s
“reforming the energy vision” (REV) for the state.149 The
Commission noted that “DER ownership is one of the most
contentious issues in the REV proceeding,”150 and after
significant debate on the issue, determined that “[it does] not
generally favor utility ownership of DER assets.”151
Second, nonutility energy storage investment is also driven
by self-interest. Many renewable energy generation projects
have been investing in on-site energy storage to firm up the
intermittency of their renewable resources.152 Such hybrid
projects have been developed for solar and storage,153 wind and
145. H.B.
2193,
78th
Leg.
Assemb.,
Reg.
Sess.
(Or.
2015),
https://olis.leg.state.or.us/liz/2015R1/Downloads/MeasureDocument/HB2193
[https://perma.cc/83FR-U9ZU].
146. Press Release, Cal. Pub. Utils. Comm’n, CPUC Sets Energy Storage Goals
for Utilities (Oct. 17, 2013) (approving CPUC, Order Instituting Rulemaking
Pursuant to Assembly Bill 2514 to Consider the Adoption of Procurement Targets
for Viable and Cost-Effective Energy Storage Systems; Decision Adopting Energy
Storage Procurement Framework and Design Program, R10-12-007, at 75, (Cal.
Pub. Utils. Comm’n Oct. 17, 2013)). Oregon’s law states “[t]he total capacity of
qualifying energy storage systems procured under this section by any one electric
company may not exceed one percent of the electric company’s peak load for the
year 2014.” Or. H.B. 2193 § 2(2)(a).
147. CAL. PUB. UTILS. COMM’N, 2015 SELF-GENERATION INCENTIVE PROGRAM
HANDBOOK 39 (2016), https://energycenter.org/programs/self-generation-incentiveprogram [https://perma.cc/QH5Q-JTZ9].
148. Jeff St. John, The Top 10 Energy Storage Stories of 2014, GREEN TECH
MEDIA (Dec. 23, 2014), http://www.greentechmedia.com/articles/read/the-top-10energy-storage-stories-of-2014 [https://perma.cc/7N7R-KXM5].
149. See Order Adopting Regulatory Policy Framework and Implementation
Plan, supra note 127, at 2.
150. Id. at 66.
151. Id. at 67.
152. See infra notes 153–155.
153. See, e.g., S&C to Build One of the Largest Energy Storage Systems in Ohio,
S&C ELECTRIC COMPANY (Sept. 15, 2015), http://www.sandc.com/news/index.php/
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storage,154 and natural gas and thermal storage.155 As more
residential, commercial, and industrial customers are investing
in on-site renewable energy generation, similar investments in
customer-owned reliability resources may become more
attractive.156 Commercially owned solar, for instance, is
booming by historical standards, with the top twenty-five
corporate solar users in the United States installing “more
than 569 megawatts of capacity at 1,100 different facilities
across the country as of August 2014.”157 Some of this growth
in commercially distributed generation is driven by the
opportunities created for those companies that offer offsite data
storage or “cloud storage” like Microsoft, Google, and
Amazon.158 Law firms, corporations, and even the U.S.
government are migrating their data from a self-service model
to an outsourcing model, rendering cloud storage the new gold
2015/09/sc-to-build-one-of-the-largest-energy-storage-systems-in-ohio/
[https://
perma.cc/C89A-MJMN] (discussing S&C Electric Company’s proposed 7-MW
energy storage facility, awarded by Half Moon Ventures in conjunction with an
Ohio municipal utility, Village of Minster, which is to be tied to a solar plant for
optimal benefits stacking); Overview, KAUA’I ISLAND UTILITY COOPERATIVE,
http://website.kiuc.coop/content/overview
[https://perma.cc/8X8P-8KXG]
(discussing SolarCity’s agreement with the Hawaiian utility, Kaua’i Island Utility
Cooperative, to construct a combined 17-megawatts solar and 52-megawatts
battery system); Salem Smart Power Project, PORTLAND GEN. ELEC.
https://www.portlandgeneral.com/our_company/energy_strategy/smart_grid/salem
_smart_power_project.aspx [https://perma.cc/5289-LLU5] (discussing PGE’s
construction of a 5-MW battery to tie with a solar array).
154. See, e.g., James Ayre, Tehachapi Energy Storage Project – SoCal Edison
Opens Largest Energy Storage Project in North America, CLEANTECHNICA (Sept.
28, 2014), http://cleantechnica.com/2014/09/28/tehachapi-energy-storage-projectsocal-edison-opens-largest-energy-storage-project-north-america/
[https://perma.cc/NM9E-HAQW].
155. MTU ONSITE ENERGY, COMBINED HEAT AND POWER FROM NATURAL GAS,
http://www.mtuonsiteenergy.com/fileadmin/fm-dam/mtu_onsite_energy/media-allsite/pdf/en/brochure/3061561_OE_Erdgas_GB_ES.pdf
[https://perma.cc/NB2PXCXM].
156. CHARLES K. EBINGER & JOHN P. BANKS, BROOKINGS, THE ELECTRICITY
REVOLUTION
(2013),
http://www.brookings.edu/research/reports/2013/11/06electricity-revolution-ebinger-banks [https://perma.cc/U7X7-5BHY] (chronicling
the rise of distributed generation).
157. Solar Industry Data: Solar Industry Breaks 20 GW Barrier; Grows 34%
over 2013, SOLAR ENERGY INDUS. ASS’N, http://www.seia.org/researchresources/solar-industry-data [https://perma.cc/3CCG-97LX]. This is just a small
segment of the 20,000 megawatts of solar capacity currently operating and the
additional 20,000 projected to come online in the next two years, but reflects a
doubling in corporate solar since 2012. Solar Means Business, SOLAR ENERGY
INDUS. ASS’N (Oct. 15, 2014), http://www.seia.org/research-resources/solar-meansbusiness-report [https://perma.cc/3HQV-LKLD].
158. Solar Means Business, supra note 157.
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standard for almost all businesses.159 As cloud storage
companies begin to realize a steady income stream from longterm data storage contracts, they are now focusing their
attention on ways to reduce operating costs.160 One of the
largest operating costs is the cost of energy, and some forwardthinking companies have begun investing in renewable energy
to fuel their energy-intensive data processing centers.161 Some,
like Microsoft, have been actively involved in public utility
proceedings related to distributed generation.162 Others, like
Apple, have invested $850 million in offsite solar energy
through a partnership with First Solar.163 As their deployment
has increased, prices have decreased, suggesting a costeffective path toward a cleaner energy grid.164
These corporate investments in distributed generation
seem to be driving a similar trend in corporate investments in
energy storage. Wholefoods, Walmart, and a number of others
have been leading the charge.165 Google announced that it
159. See Brandon Butler, Gartner: Top 10 Cloud Storage Providers, NETWORK
WORLD (Jan. 3, 2013, 8:21 AM), http://www.networkworld.com/article/2162466/
cloud-computing/gartner-top-10-cloud-storage-providers.html
[https://perma.cc/
FDF4-373F].
160. Brian Janus, Director of Energy Strategy, Presentation at Microsoft,
POWER Electric Conference in New Orleans, LA (2014); Comments of Microsoft
Corporation and Siculus, Inc. In re Distributed Generation, No. NOI-2014-001
(Iowa Utils. Bd., Feb. 26, 2014).
161. See, e.g., Heather Clancy, Amazon, Microsoft, Google Fuel up Renewable
Energy Pledges, FORBES (Nov. 21, 2014, 1:23 PM), http://www.forbes.com/
sites/heatherclancy/2014/11/21/amazon-microsoft-google-fuel-up-renewableenergy-pledges/
[https://perma.cc/YTM3-9TBV]
(discussing
Amazon
and
Walmart’s commitments to rely 100% on renewable energy); Aimee Riordan,
Microsoft Announces 175-Megawatt Wind Farm Deal, Broadens Renewable Energy
THE
FIRE
HOSE
(July
15,
2014),
Commitment,
MICROSOFT:
http://blogs.microsoft.com/firehose/2014/07/15/microsoft-announces-175-megawattwind-farm-deal-broadens-renewable-energy-commitment/ [https://perma.cc/VJC9TBDW].
162. Comments of Microsoft Corporation and Siculus, Inc., supra note 160.
163. California Flats Solar Project: Project Overview, FIRST SOLAR,
http://www.firstsolar.com/en/about-us/projects/california-flats
[https://perma.cc/
E3XG-D4XN] (reporting the twenty-five year purchasing agreement for 280
megawatts solar for Apple and PG&E).
164. Giles Parkinson, Solar Grid Parity in All 50 US States by 2016, Predicts
Deutsche Bank, CLEANTECHNICA (Oct. 29, 2014), http://cleantechnica.com/2014/
10/29/solar-grid-parity-us-states-2016-says-deutsche-bank/
[https://perma.cc/
YD3U-ARGS].
165. SolarCity Announces New Solar Power and Energy Storage Projects with
Walmart, SOLARCITY (Nov. 20, 2014), http://www.solarcity.com/newsroom/
press/solarcity-announces-new-solar-power-and-energy-storage-projects-walmart
[https://perma.cc/TN4V-E2H3] (discussing SolarCity’s installation and testing of
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would use thermal storage to cool the $300 million data center
it is building on 15 hectares of land in Taiwan.166 Entities like
Microsoft and Amazon may not be far behind for the same
reasons. Public institutions like universities, hospitals, and
even prisons have also invested in storage to enhance the
resiliency of their systems.167 Solar panels and batteries have
been combined to create a microgrid on Alcatraz Island, the
national park in the San Francisco Bay.168 Such efforts can
result in reduced electricity prices and enhanced on-site
reliability.169 States in the Northeast are also working on a
proposal to enhance resilience after Hurricane Sandy, which
includes a plan for energy storage. Both New York’s REV
initiative, which prefers nonutility owned storage, and New
Jersey’s Energy Resilience Bank, which provides $200 million
to support the development of nonutility owned DERs across
the state, are encouraging private storage development.170
There are no signs of a slowdown in private energy storage
ownership. On the contrary, analysts are predicting significant
increases in privately owned storage, with estimates of more
than 800 megawatts of storage coming online in 2019—a more
than 1200% increase from the 62 megawatts of energy storage
that entered the market in 2014.171 The amount of storage
energy storage projects co-located with solar power generation at thirteen
Walmart facilities since early 2013 and and its plans to incorporate ten additional
storage projects in the next year).
166. Adam Lesser, Rethinking On-Demand Energy Storage, GIGAOM (Apr. 10,
2012),
https://gigaom.com/2012/04/10/rethinking-on-demand-energy-storage/
[https://perma.cc/3YV5-SYDM].
167. See, e.g., GLOBAL ENERGY STORAGE DATABASE, supra note 132 (use
dropdown filter “United States” and dropdown filter “Florida”) (showing
universities and schools with energy storage).
168. Alcatraz Island Microgrid, DOE GLOBAL ENERGY STORAGE DATABASE,
http://www.energystorageexchange.org/projects/1095
[https://perma.cc/XB74RJEP] (last updated Mar. 16, 2015).
169. See THE SOLAR FOUND., BRIGHTER FUTURE: A STUDY ON SOLAR IN U.S.
SCHOOLS (2014), http://www.seia.org/research-resources/brighter-future-studysolar-us-schools-report [https://perma.cc/KV9H-JWSD].
170. See Order Adopting Regulatory Policy Framework and Implementation
Plan, supra note 127, at 3 n.3 (defining DER to include distributed storage);
Energy Resilience Bank, STATE OF N.J. BD. OF PUB. UTILS. (Oct. 20, 2014),
http://www.state.nj.us/bpu/commercial/erb/ [https://perma.cc/3FKE-78ZG].
171. See, e.g., Gavin Bade, What’s Next in the Energy Storage Boom, and What
Utilities Need to Know, UTILITY DIVE (Apr. 2, 2015), http://www.utilitydive.com/
news/whats-next-in-the-energy-storage-boom-and-what-utilities-need-to-know/
382465/ [https://perma.cc/CEG8-84YP]; see also CAL. ENERGY COMM’N, 2020
STRATEGIC ANALYSIS OF ENERGY STORAGE IN CALIFORNIA (2011),
http://www.energy.ca.gov/2011publications/CEC-500-2011-047/CEC-500-2011-
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outside the ownership and control of the utilities has the
potential to peak through residential usage of energy storage.
The first area of huge growth in residential storage would be in
electric vehicle (EV) batteries. Part of this growth may be
fueled by Tesla Motors’ $5 billion investment in the
Gigafactory, which is poised to double the global production of
lithium-ion batteries by 2020.172 Tesla’s CEO, Elon Musk,
hopes to drive down the cost of battery packs by 30%, a goal
that may translate into lower-cost, and more widely available,
EVs.173 Adoption of electric vehicles in the U.S. has yet to reach
proportions where their use as battery storage to serve
balancing functions would be significant, but a number of
states are moving forward with initiatives to develop more
charging stations to encourage greater use.174 Should that
occur, EV batteries would have the potential to create even
more separation between the ownership and control of storage
resources. Some have argued that the economics would not yet
prove feasible for implications of using vehicle batteries to store
grid electricity generated at off-peak hours for off-vehicle use
during peak hours.175 But others, including BMW, are
developing pilot projects to demonstrate the feasibility of using
047.pdf [https://perma.cc/747S-BK72].
172. See Peter Elkind, Tesla Closes on Free Nevada Land for Gigafactory,
FORTUNE (Oct. 28, 2014), http://fortune.com/2014/10/28/tesla-closes-on-freenevada-land-for-gigafactory [https://perma.cc/G84K-V4T9]; Tesla Gigafactory,
TESLA, http://www.teslamotors.com/gigafactory [https://perma.cc/Y4XD-JURL].
“In the meantime, Asian competitors (or partners) like Panasonic, LG Chem,
NEC/A123 and a host of Chinese contenders are pushing toward the magical price
point of $500 per kilowatt-hour for lithium-ion batteries at scale, leading big grid
storage players like AES to name it the battery chemistry of choice for the rest of
the decade.” St. John, supra note 148.
173. Tesla Gigafactory, supra note 172; Andrew Moseman, Confirmed: The
$35,000 Tesla Model 3 Will Be Unveiled in March 2016, POPULAR MECHANICS
(Sep. 3, 2015), http://www.popularmechanics.com/cars/a12983/35000-tesla-modeliii-coming-in-2017/ [https://perma.cc/K6RB-5W62] (reporting a Tesla Model 3 will
be available for $35,000).
174. Several States Are Adding or Increasing Incentives for Electric Vehicle
Charging Stations, U.S. ENERGY INFO. ADMIN. (Dec. 11, 2014),
http://www.eia.gov/todayinenergy/detail.cfm?id=19151
[https://perma.cc/G6MFK58Y] (noting Washington and Oregon’s plans to facilitate PEV travel by
installing recharging stations at convenient intervals on major travel corridors).
175. Scott B. Peterson, The Economics of Using Plug-in Hybrid Electric Vehicle
Battery Packs for Grid Storage, 195 J. POWER SOURCES 2377 (2010) (finding
limited incentives from profits or benefits to the grid to provide sufficient
incentive to the vehicle owner to use the battery pack for electricity storage and
later off-vehicle use).
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them not just for private, but public use.176 EV batteries owned
by many individuals around the country would reflect one of
the most diffuse scenarios with ownership of DER occurring on
the individual user level (as opposed to the residential level).
Residential use of storage would not be limited to electric
vehicles, however. Seeking to capitalize on the corporate
renewable energy model, the number one solar installer in the
country, SolarCity, has indicated its plans to sell rooftop solar
not as a stand-alone product, but as a packaged product with
an individual energy storage device.177 “GTM Research’s new
report forecasts that the United States will see 318 megawatts
of behind-the-meter solar-plus-storage capacity installed
through 2018, surpassing $1 billion by that time.”178
Tesla has targeted an even broader class of electricity
customers to embrace energy storage, with the intent to
provide a residential storage device for those without solar
panels or an electric vehicle. Tesla’s recent announcement that
its Gigafactory will generate not only car batteries, but
batteries for use by individual customers at home, provides yet
another indication of the shift towards distributed
reliability.179 If Tesla’s vision becomes a reality, customers will
be able to self-supply some of their own reliability through
back-up battery packs for the home. Customer demand for the
Powerwall is strong, with reports indicating the home storage
device is already sold out through mid-2016.180 In short, these
176. Press Release, PG&E, PG&E and BMW Partner to Extract Grid Benefits
from Electric Vehicles (Jan. 5, 2015), http://www.pge.com/en/about/newsroom/
newsdetails/index.page?title=20150105_pge_and_bmw_partner_to_extract_grid_b
enefits_from_electric_vehicles [https://perma.cc/TR7Z-F6JS]; see also UCLA
Smart
Grid
Energy
Research
Center,
http://smartgrid.ucla.edu/
projects_evgrid.html
[https://perma.cc/NEF2-HVET]
(describing
the
WINSmartEV that enables power stored in EV to feed back into the grid).
177. Zachary Shahan, Solar City to Sell Battery Storage with Every System
Within 5–10 Years, PLANETSAVE (Sep. 21, 2014), http://planetsave.com/2014/09/21/
solarcity-sell-battery-storage-every-system-within-5-10-years/
[https://perma.cc/
T3RL-JNQR].
178. St. John, supra note 148.
179. Brian Fung, This New Tesla Battery Will Power Your Home, and Maybe
the Electric Grid Too, WASH. POST: THE SWITCH (Feb. 12, 2015),
http://www.washingtonpost.com/blogs/the-switch/wp/2015/02/12/this-new-teslabattery-will-power-your-home-and-maybe-the-electric-grid-too/ [https://perma.cc/
3PBX-KWB8].
http://www.teslamotors.com/powerwall
180. Powerwall,
TESLA,
[https://perma.cc/Y8U9-P5V5]; Chris Welch, Tesla Announces 38,000 Pre-orders
for Powerwall Home Battery, THE VERGE (May 6, 2015), http://www.theverge.com/
2015/5/6/8561931/tesla-38000-powerwall-preorders-announced [https://perma.cc/
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developments suggest that the growth of nonutility owned
storage resources is likely to continue.
2.
Demand Response
The second reliability resource being developed by private
owners is demand response (DR). DR also is a distributed
resource, but in a much different manner. By definition, DR
resources are nonutility owned. Customers own the resources
that are being ramped down during periods of peak demand.
They differ significantly from energy storage, not requiring any
investment in a new product (except some automated
operators). Instead, DR can be viewed as cashing in on the
opportunity cost of electricity, as it is a commitment to forego
the use of electricity during peak periods when needed by the
grid operator in exchange for a payment.181
DR resources are similar to, and yet different from, energy
storage resources. Both resources are used to enhance
reliability of the grid.182 Both resources can be customer owned.
But they are different in that only energy storage involves a
physical asset more in line with traditional supply-side assets.
They are also different in that both utilities and customers can
own energy storage, but only a customer can own DR resources.
That renders a discussion of utility ownership of DR resources
a bit of a misnomer since DR resources are, by definition, an
aggregation of customers that are willing to reduce electricity
usage during peak hours at the request of the utility or grid
operator.183
DR can take many forms, including residential incentives
like time-of-use rates, direct load control programs, or
contractual arrangements where customers agree to allow
utilities or grid operators to monitor and control customer
C5W4-39EB].
181. Energy storage devices may serve as enablers of DR, allowing a customer
that could not otherwise serve as a DR resource to do so.
182. As the counsel for petitioners in the Supreme Court case addressing the
validity of FERC’s Order 745 regulating DR indicated to the Court, FERC
provided a market for DR to reduce wholesale prices, “which is important, but
even more fundamentally, Your Honor, to protect the reliability of the grid.”
Transcript of Oral Argument at 23, FERC v. Elec. Power Supply Ass’n, 135 S.Ct.
2049 (2015) (No. 14-840).
183. Demand Response, U.S. DEP’T OF ENERGY, http://energy.gov/oe/technologydevelopment/smart-grid/demand-response [https://perma.cc/Q7HT-L7AU].
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energy consumption in real time.184 This discussion focuses on
those DR resources that are “controllable” or “dispatchable” by
the utility when they need it—the ones that are “on call.”185
Such resources are usually controllable through a contract with
a utility, third-party provider, or regional transmission
operator (RTO) that commits them to being available for a
reduction in energy use at specific times. Corporate DR is
currently driving the markets, with the majority of DR
participation in recent years attributed to third-party DR
providers “aggregating” many individual corporations’
commitments.186 These are commitments by customers to
reduce their usage during peak hours in exchange for an
incentive payment. The commitments are then aggregated into
larger DR blocks to sell in the wholesale markets.187
One of the largest RTOs serving the northeast, PJM,
provides a good example of a typical DR program. “[A]gents
called Curtailment Service Providers (CSPs), work with retail
customers who wish to participate in DR. CSPs aggregate the
demand of retail customers, register that demand with PJM,
submit the verification of demand reductions for payment by
PJM, and receive the payment from PJM.”188 Individual
utilities also implement DR programs, geared primarily to
commercial and industrial customers that install required
equipment.189 These DR resources can bid into one or more of
three available markets: (1) energy markets; (2) capacity
184. See ENERNOC, DEMAND RESPONSE: A MULTI-PURPOSE RESOURCE FOR
UTILITIES
AND
GRID
OPERATORS
(2009),
http://www.enernoc.com/
themes/bluemasters/images/brochures/pdfs/2-Whitepaper-DR-A_Multi-Purpose_
Resource.pdf [https://perma.cc/7KKK-FE62].
185. This is in contrast to efforts to shift demand from onpeak to offpeak. This
is because the focus is on resources that can be called upon to assist in day-to-day
fluctuations.
186. SIEMENS, ENROLLING WITH A DEMAND RESPONSE AGGREGATOR (2011),
https://w3.usa.siemens.com/buildingtechnologies/us/en/energy-efficiency/demandresponse/Documents/BT_DR_aggregatorwhitepaper.pdf [https://perma.cc/DZ6QXMFY].
187. See DOUG HURLEY ET AL., THE REGULATORY ASSISTANCE PROJECT,
DEMAND RESPONSE AS A POWER SYSTEM RESOURCE 43 (2013).
188. Demand Response Fact Sheet, PJM (Jun. 29, 2015), http://www.pjm.com/~/
media/about-pjm/newsroom/fact-sheets/demand-response-fact-sheet.ashx [https://
perma.cc/7DF6-F7KC].
189. See, e.g., Demand Response, CON ED, http://www.coned.com/
energyefficiency/demand_response.asp [https://perma.cc/BMW2-F2ZF] (providing
two and twenty-one hour notifications over a three year period with the required
meter).
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markets;190 and (3) ancillary services markets.191 PJM already
relies on DR for 6% of its peak system needs.192 Interestingly,
most of the DR that has been secured by utilities/RTOs is
through the capacity markets.193 In an important victory for
DR proponents, the Supreme Court recently upheld FERC’s
authority over DR in wholesale markets.194
Although some residential customers participate in DR,
the bulk of the resources are found in commercial and
industrial customers. DR works best for electricity use that is
not time or quality sensitive—tasks that can be done later (e.g.,
hotel laundry that can wait until later) or adjustments with
minimal impact to the user (e.g., drop the thermostats two
degrees).195 For these reasons, the majority of DR is found in
corporate or industrial sources, sources with large electricity
usage and more flexibility.196 As just one example, engineers
190. Where price signals do not effectively impact supply and demand for
electricity, some regions have created capacity markets to ensure that a long-term
supply will be available when it is needed most. These capacity markets provide
an additional incentive for developers and owners of generating capacity (i.e.
power plants or DR providers) to make their capacity available to electric markets
where price signals alone would not. Capacity providers are paid on a kilowattper-year basis for the capacity that a power plant can generate or, in the case of
DR, the capacity of power that can be reduced. What is a Capacity Market?,
ENERNOC, http://www.enernoc.com/our-resources/term-pages/what-is-a-capacitymarket [https://perma.cc/4GGM-V7MR]. Capacity is obtained three years in
advance. For example, the capacity auction held in May 2013 obtained capacity
for the 2016/2017 delivery year. Demand Response Fact Sheet, supra note 188.
191. ENERNOC, supra note 190.
192. CRAIG GLAZER, PJM INTERCONNECTION, DEMAND RESPONSE IN PJM:
PAST SUCCESSES AND THE MURKY LEGAL FUTURE OF DEMAND RESPONSE . . . (Jul.
3,
2014),
https://www.iea.org/media/workshops/2014/esapworkshopii/Craig_
Glazer.pdf [https://perma.cc/5LDH-6TMZ].
193. “Energy payments that are the subject of Order 745 have not been a
material component of EnerNOC’s revenues. Of EnerNOC’s approximately $1
billion of revenue over the last three years, these payments have represented
approximately 2% of those revenues.” EnerNOC Comments on Circuit Court
(May
27,
2014),
Decision
on
FERC
Order
745,
ENERNOC
http://investor.enernoc.com/releasedetail.cfm?releaseid=850532 [https://perma.cc/
2PBS-G2GU].
194. FERC v. Elec. Power Supply Ass’n, 136 S. Ct. 760 (2016).
195. NAT’L ACTION PLAN FOR ENERGY EFFICIENCY, U.S. DEP’T OF ENERGY,
COORDINATION
OF
ENERGY
EFFICIENCY
AND
DEMAND
(2009),
https://www.smartgrid.gov/document/coordination_energy_efficiency_and_demand
_response_resource_national_action_plan_energy_eff
[https://perma.cc/J8G2X7RT].
196. See Demand Response Resources, DEMAND RESPONSE RESEARCH CTR.,
http://drrc.lbl.gov/research-areas/demand-response-resources
[https://perma.cc/
NV8H-3676]; Jamshid Aghaei & Mohammad-Iman Alizadeh, Demand Response in
Smart Electricity Grids Equipped with Renewable Energy Sources: A Review, SCI.
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have demonstrated the capabilities of using the heating,
ventilating, and air conditioning systems of buildings as
massive batteries, well suited to balancing reserves and other
high-frequency regulation resources in lieu of energy storage
devices.197
EnerNOC, the largest third-party provider of DR services,
has capitalized on these corporate DR resources.198 “EnerNOC
has provided DR software, technology, and managed services to
hundreds of clients, including vertically integrated utilities,
system operators, T&D [transmission & distribution]
companies, and energy retailers—in both traditionally
regulated and restructured markets around the world.” 199
EnerNOC contracts with nonresidential customers, installs
control devices on site, and reduces customers’ consumption as
needed, on a real-time basis, pursuant to agreed terms.
Despite the prevalence of commercial DR, analysts view
residential DR as the largest untapped market potential.200 A
number of utilities have implemented a direct load control
program, which seeks to install an automated remote in
residential buildings to control air conditioning or water
heating during periods of grid stress in exchange for a monthly
credit.201 Similarly, engineers see significant market potential
in the use of residential DR,202 particularly in areas of the
United States such as Florida, where energy-intensive
resources have some flexibility in the time of use. One example
is pool pumps, devices that filter pool water and run between
DIRECT
(Nov.
2,
2012),
http://www.sciencedirect.com/science/article/pii/
S1364032112005205 [https://perma.cc/9WXB-8J3S].
197. He Hao et al., Ancillary Service to the Grid Through Control of Fans in
Commercial Building HVAC Systems, 5 IEEE TRANS. ON SMART GRID 2066
(2014); NAT’L ACADS. OF SCIS., MATHEMATICAL SCIENCES RESEARCH CHALLENGES
FOR THE NEXT-GENERATION ELECTRIC GRID: SUMMARY OF A WORKSHOP 38 (2015).
198. ENERNOC, http://www.enernoc.com [https://perma.cc/K9UN-6X5J].
199. Comments of the Demand Response Supporters on Tentative
Implementation Order, Act 129 Energy Efficiency Program – Phase III, No. M2014-2424864, at 2 n.7 (Pa. Pub. Utils. Comm’n, Apr. 27, 2015),
www.puc.pa.gov/pcdocs/1356596.pdf [https://perma.cc/2RGU-MZQM].
200. See HURLEY ET AL., supra note 187, at 11; FED. ENERGY REGULATORY
COMM’N, A NATIONAL ASSESSMENT OF DEMAND RESPONSE POTENTIAL 29 (2009),
http://www.ferc.gov/legal/staff-reports/06-09-demand-response.pdf [https://perma.
cc/SC7D-Q7AR] [hereinafter NATIONAL ASSESSMENT OF DR POTENTIAL].
201. See, e.g., Cool Credits Direct Load Control Program, WIS. PUB. SERV.,
http://www.wisconsinpublicservice.com/home/cool_credits.aspx [https://perma.cc/
MF6J-6SPC].
202. See id.; NATIONAL ASSESSMENT OF DR POTENTIAL, supra note 200, at 29.
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six to twelve hours per day in most pool-owning homes.203
There is no need for these pumps to run during peak electricity
demand, and shifting consumer behavior and installing
automated control sensors on one million pools can provide a
powerful DR service.204 Florida Power & Light already has over
800,000 participants in its On Call Program, which installs
automated controls on residential devices and uses them
sporadically in exchange for payment.205
As efforts to tap into the vast potential of residential DR
resources through contract, as opposed to time of use, begin to
increase, the DR resources will become even more diffuse.
“PJM’s goal is to see DR fully integrated into the retail market.
That will happen when a large number of retail electric
customers, including homes and small businesses, have access
to demand response options.”206 PJM is not alone in its efforts,
suggesting DR is likely to continue to grow into its place in our
electricity grid.
B.
Transaction Costs of Customer-Owned Reliability
Resources
This shift in ownership of energy resources to self-provide
has significant implications for the reliability of the grid. This
Section borrows from economic theories of separation and
control to analyze the impacts of this evolution to the “make
and buy plus” scenario. As the number of customer-owned
reliability resources continues to grow, the connection between
those in charge of reliability of the grid and those impacting
the grid is becoming more attenuated. This is exacerbating
problems associated with public-private goals and highlighting
a lack of transparency, increasing the costs of trying to align
the public and private interests while balancing competing
goals.
NAT’L ACADS. OF SCIS., supra note 197, at 38–39.
See, e.g., Alec Brooks et al., Demand Dispatch, 2010 IEEE POWER AND
ENERGY MAGAZINE 20 (May/June 2010), http://ieeexplore.ieee.org/stamp/
stamp.jsp?tp=&arnumber=5452801 [https://perma.cc/8PXL-J3TG]; Hao et al.,
supra note 197.
205. On
Call,
FPL,
https://www.fpl.com/save/programs/on-call.html
[https://perma.cc/QUB7-S9VT]; Stuart Schare & Brett Feldman, A New Era of
Demand Response, PEAK LOAD MGMT. ALLIANCE (Aug. 24, 2015),
http://www.peakload.org/news/247460/A-New-Era-of-Demand-Response.htm
[https://perma.cc/C2B6-Z6MX].
206. Demand Response Fact Sheet, supra note 188, at 2.
203.
204.
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This Section identifies the growing disconnect between
those who are responsible for reliability of the grid and the
number of private customers who own the resources that
impact reliability. It draws upon the separation of ownership
and control literature to explore two principal pitfalls
associated with the growing disconnect between the private
customers who own the reliability resources and those who are
in control of reliability of the grid: (1) divergent interests; and
(2) information asymmetries. They apply to different degrees
for energy storage and DR, but they are pitfalls that should be
contemplated for both.
1.
Divergent Interests
The first complication of increased separation of ownership
and control is the risk of divergent interests between those in
who are in charge of reliability of the grid (utilities and grid
operators) and those who own the reliability resources
(customers). “Because differences among personal goals may
exist, it is possible that an employee will substitute the goals of
the firm with his/her own goals.”207 Sometimes the agent is
motivated to act in his own best interests rather than those of
the principal. For instance, an agency problem arises if the
cooperative behavior, which would maximize the group’s
welfare, is not consistent with each individual’s self-interest.208
Transaction cost economics also reminds us that there are costs
to the separation of ownership and control, including the cost of
monitoring the reliability resource owners, and the residual
loss between any divergent behavior and the ideal.209 In
applying principal-agent labels to the relationship between the
utility managing the reliability of the grid and the owners of
the reliability resources, even without a contractual
relationship, the customer owners can be seen as “agents” of
the utility “principal” in its efforts to manage the reliability of
the grid.
The rise of distributed generation has prompted lengthy
discussions about the divergent interests of the electric utilities
207. OLOF ARWINGE, INTERNAL CONTROL 25 (2013).
208. See Michael C. Jensen, Self-Interest, Altruism, Incentives and Agency
Theory, 7 J. APPLIED CORP. FIN. 40 (1994), https://www.mycgaonline.org/
bbcswebdav/courses/Resources/erh/b7.jensen.pdf [https://perma.cc/88DV-F3AW].
209. Jensen & Meckling, supra note 105, at 22.
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and the customers.210 Many are calling for changes to the
utility business models to better align utility and distributed
generation goals.211 The three primary ways that distributed
generation does not coincide with the interests of the utility are
as follows: (1) reduced revenues and profits caused by selfsupply of electricity; (2) the continuing need to nevertheless
provide back-up service for the customers despite their reduced
bills; and (3) the small scale which renders such distributed
generation not dispatchable.212 As congressional testimony has
noted, “there’s not any discussion in the value proposition of
the reliability services provided by base load units. . . . The
more we move this out into distributed and undispatched. . . .
The harder and harder it’s going to be to manage reliability on
the grid.”213 The proposed solutions to these problems range
from decoupling revenues from volume to enhancing utility
ownership of these customer-sited resources.214
Unfortunately, there has been little or no comparable
analysis of the alignment of interest between utilities and
owners of reliability resources like energy storage and DR.215
These DERs are different in that their use does not have the
same revenue-reducing impacts as distributed generation.216
Although distributed generation can be both a burden and a
210. See, e.g., CHARLES GOLDMAN ET AL., LAWRENCE BERKLEY NAT’L LABS.,
UTILITY BUSINESS MODELS IN A LOW LOAD GROWTH/HIGH DG FUTURE: GAZING
INTO THE CRYSTAL BALL? (2013).
211. ELEC. POWER RESEARCH INST., CREATING INCENTIVES FOR ELECTRICITY
PROVIDERS TO INTEGRATE DISTRIBUTED ENERGY RESOURCES 5 (2007),
http://www.energy.ca.gov/2008publications/CEC-500-2008-028/CEC-500-2008028.pdf [https://perma.cc/5ZQW-EF7G].
212. Id. Renewable generation in general is not dispatchable, meaning it
cannot be called upon to follow load when it is needed. Instead, it is only available
when the sun shines or the wind blows.
213. Electric Grid Reliability: Hearing before the S. Comm. on Energy and Nat.
Res., 113th Cong. (2014), http://www.gpo.gov/fdsys/pkg/CHRG-113shrg87851/
pdf/CHRG-113shrg87851.pdf [https://perma.cc/53J5-9P5Y].
214. Claire Cameron, SEPA: Utilities Should Own Solar Inverters, UTILITY
DIVE (July 8, 2014) http://www.utilitydive.com/news/sepa-utilities-should-ownsolar-inverters/283350/ [https://perma.cc/LRL4-W9BQ].
215. DNV GL, NEW YORK INDEPENDENT SYSTEM OPERATOR, A Review of
Distributed Energy Resources, (Sept. 2014), http://www.nyiso.com/public/webdocs/
media_room/publications_presentations/Other_Reports/Other_Reports/A_Review_
of_Distributed_Energy_Resources_September_2014.pdf [https://perma.cc/2QVQNSNM].
216. MASS. INST. OF TECH., THE FUTURE OF THE ELECTRIC GRID: AN
INTERDISCIPLINARY MIT STUDY 111 (2011), http://mitei.mit.edu/system/
files/Electric_Grid_Full_Report.pdf [https://perma.cc/R6FC-9ENY] (noting that
customer-sited distributed generation reduces utility revenue).
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benefit for reliability of the grid, there is less controversy
associated with energy storage’s and DR’s roles as resources
that provide reliability benefits to the grid.217 Nevertheless,
there is no guarantee that the goals of those in control of the
energy storage and DR are in alignment with the goals of the
utilities. Ideally, the utility should be able to rely on these
resources as part of their grid management strategies. At the
very least, the utility should know enough to enable it to make
a conscious decision not to include them.
The degree to which the principal-agent analogy applies
differs depending on which DER is discussed. For both
distributed generation and energy storage, for instance, the
likelihood of divergent interests is strong between the utility
(principal) and the customer (agent). The customer is under no
contractual obligation to act in a manner that complies with
the utility’s wishes. They are not being paid by the utility to
perform a reliability function. In fact, these customers are often
acting in a manner that complies with their own wishes,
having paid for these technologies out of their own pockets.
This can lead to divergent interests between the utility, that
might find it helpful to use a customer’s resources and a
customer who has no interest in making its private resources
available for public use. On the other hand, many of these
technologies are subsidized through tax credits or other
incentive payments, suggesting there is a public interest in
their deployment. For those customers, there is an argument
that their interests should be a little more closely aligned to the
public interest. Provision of those tax credits, however, are not
conditional on a willingness to share the resources procured
with those tax credits for the greater good. In short,
relationships between customers and utilities with respect to
energy storage are complicated because they are not
necessarily dictated by contract and may be developed for a
multitude of purposes.
DR, on the other hand, is less likely to suffer from high
transaction costs due to divergent interests. These services are
often created explicitly for the purpose of serving utilities, and
aggregated DR customers are in contractual relationships with
those who use their services. Arguably, those customers in a
contractual relationship with the utility are more closely bound
217.
See supra note 8.
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than those who are not. Nevertheless, utilities and private
DER owners may not have similar incentives with respect to
long-term use of these resources. Individual customers may
only maintain their reliability resources if there are sufficient
private incentives to do so. If the tax incentives or rebates
change over the years, customers may choose to discontinue
use of these reliability resources. DR, particularly, is quite
unlike other reliability resources in that it requires no “steel in
the ground,” and therefore fails to provide the same concrete
comfort that the resource will be around and available in the
future.218 If utilities come to rely on these private reliability
sources, they may find themselves without any recourse if
individual customers decide to terminate their continued
investment in the reliability resource. The utility is still at the
mercy of the customer, unlike if the utility was reducing its
own load to address peak usage.
Electric vehicle batteries provide a prime example of the
potential problems in divergent interests. For reliability
resources that serve double duty—injecting electricity back into
the grid (public purpose) and serving as an individual’s
primary source of transportation (private purpose)—it is easy
to imagine that their private use will always trump their public
use. Most people would be unwilling, for instance, to forgo the
use of their car when needed because it is serving the grid at
that moment. That leaves little in terms of the confidence the
utility can have that a particular resource will be there when it
is needed by the grid. Similarly, another constraint can be seen
with DR in that it can often only be called upon by the utilities
during emergency situations.219 Surveys also suggest that
when DR resources are the most in need, i.e., extreme cold
spells, customers are least likely to bid in their DR resources
for multiple days in a row.220
218. See Ken Silverstein, Demand Response Is Cascading, PUB. UTILS.
FORTNIGHTLY (June 24, 2015), http://www.fortnightly.com/fortnightly/demandresponse-cascading [https://perma.cc/DP4J-XZ8S].
219. Renae Deaton, Senior Manager Rates and Tariffs Dept., Presentation on
Florida Power & Light at the 42nd Annual PURC Conference: Golden Egg or
Scrambled Egg? Impacts of Decentralizing Utility Services (2015); but cf. ERIC
HIRST, LONG-TERM RESOURCE ADEQUACY: THE ROLE OF DEMAND RESOURCES
(2003),
http://www.hks.harvard.edu/hepg/Standard_Mkt_dsgn/Hirst_LTResourceAdequac
yReport_1-03.pdf [https://perma.cc/DGD8-ADXM].
220. FED. ENERGY REGULATORY COMM’N, WINTER 2013–2014 OPERATIONS AND
MARKET PERFORMANCE IN RTOS AND ISOS, (2014), http://www.ferc.gov/legal/staff-
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Nonutility ownership is not the only distinguishing feature
of storage devices. Energy storage projects also can be
differentiated from the nonutility-owned reliability resources of
the past in their use. Whereas other third-party owned
“merchant” projects were constructed to serve the utility needs
based on projected market demand, these third-party owned
“customer” projects were constructed to serve the utility needs
based on projected market demand, these projects are often
constructed to self-serve the owner. Even though the utilities
are now dependent on external sources for their energy
resources, noncustomer, private resources were created for the
purpose of serving the public and providing them to utilities.
For instance, many energy storage resources are now obtained
via competitive solicitations.221 This creates a form of mutual
dependency that helps to foster fair and efficient contracts.222
In contrast, where the resources are created for self-supply,
there is not the same sense of mutual dependency that binds
the parties together. This is ironic, however, since very few
customers want to be completely cut off from the grid. It may
be precisely because the utility functions in the background
acting as a form of insurance that the owner is able to invest
reports/2014/04-01-14.pdf [https://perma.cc/PR3N-H2DK].
221. See, e.g., Request for Proposals – Energy Storage System, HAWAIIAN
ELECTRIC (May 21, 2014), http://www.hawaiianelectric.com/portal/site/heco/
menuitem.508576f78baa14340b4c0610c510b1ca/?vgnextoid=03ebf219fe9a5410Vg
nVCM10000005041aacRCRD&vgnextchannel=a595ec523c4ae010VgnVCM100000
5c011bacRCRD&appInstanceName=default
[https://perma.cc/538Y-P4HX]
(showing that Hawaiian Electric Company issued an RFP for 60–200 megawatts
of energy storage); Request for Proposal for New Generation, Energy Storage and
Demand Response Resources (“2013 GS & DR RFP”), LONG ISLAND POWER
AUTHORITY (Oct. 18, 2013), http://www.lipower.org/proposals/GSDR.html
[https://perma.cc/5AYB-BAFH] (showing that the Long Island Power Authority
issued an RFP for up to 150 megawatts of energy storage); Eric Wesoff, New
Jersey Begins the Process of Deploying Grid Scale Energy Storage, GREEN TECH
MEDIA (Oct. 23, 2014), http://www.greentechmedia.com/articles/read/New-JerseyBegins-the-Process-of-Deploying-Grid-Scale-Energy-Storage
[https://perma.cc/
7HXR-3JAN] (discussing New Jersey Board of Public Utilities’ approval of a $3
million competitive solicitation (RFQ) for behind-the-meter energy storage
technologies, in part to regulate frequency); Eric Wesoff, Another 40MW of GridScale Energy Storage in the California Pipeline, GREEN TECH MEDIA (Jan. 22,
2014),
http://www.greentechmedia.com/articles/read/Another-40-MW-of-GridScale-Energy-Storage-in-the-California-Pipeline
[https://perma.cc/FZR3-3R88]
(explaining that the Imperial Irrigation District was in California’s RFQ for 40
megawatts of energy storage).
222. See, e.g., Tiziana Casciaro & Mikolaj Jan Piskorski, Power Imbalance,
Mutual Dependence, and Constraint Absorption: A Closer Look at Resource
Dependence Theory, 50 ADMIN. SCI. Q. 167 (2005).
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more confidently in his or her own distributed resources.
To varying degrees, the utility is vulnerable to the impacts
of divergent interests for both DR and storage owners. Utilities
may end up overinvesting in other reliability resources,
assuming that customer-owned resources will have the same
availability as non-customer-owned resources, or otherwise
underestimating the possibility of divergent interests when
trying to incorporate these resources into the grid. By failing to
recognize the likelihood of divergent interests, the utility may
be missing opportunities to realize the full value of these
resources.
Despite the possibility of these divergent interests, there is
one interest that is common to both utilities and owners—a
desire to maintain the reliability of the grid. By focusing on
this shared interest, all stakeholders may be able to transcend
their differences in a way that provides a net social benefit.
Nevertheless, there are extreme difficulties in trying to tease
out what distributed reliability sources are used solely for the
user’s own benefit and to what degree that individual use has
benefits beyond the individual typical public good. This
disconnect between entities responsible for reliability and those
who control the reliability resources has important
ramifications for the continued reliability of the grid.
2.
Asymmetric Information
The second complication of increased separation of
ownership and control is the likelihood of increased
asymmetries in information. When utilities were vertically
integrated, utilities had access to all the information.223 But as
utilities began to rely on contracts and markets for their
reliability resources, it was more difficult for the utilities to
maintain complete information contemporaneously.224 Just as
“energy service markets are likely to be characterized by
asymmetric information between producer and purchaser and
between market intermediaries at different stages along the
223. See MARK GOTTFREDSON ET AL., BAIN & CO., HOW UTILITIES SHOULD
EVALUATE
UPSTREAM
AND
DOWNSTREAM
INTEGRATION
(2013),
http://www.bain.com/publications/articles/how-utilities-should-evaluate-upstreamand-downstream-integration.aspx [https://perma.cc/W7S7-6GZ3].
224. Id.
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supply chain,” so too are distributed reliability relationships.225
In the economic literature, such asymmetries are caused by the
inability of principals to assess whether the agents are
complying with their wishes or acting in their best interest.226
In this context, however, it refers to the inability of the utilityprincipal to “see” all the agent’s DER resources operating on
the grid, know which ones need to be included in reliability
planning, and know which ones are at its disposal. This is
primarily a problem for energy storage, since the type of DR
envisioned in this Article involves a contract between the
customer and the utility or third-party.
Historically, contractual mechanisms served to help
alleviate the tensions associated with the external ownership of
peaker plants after restructuring.227 Once a customer enters
into a contract with a utility, the two parties create a platform
for sharing information. Similarly, modern reliability resources
that are developed to serve the utility are bound to them
through contractual terms. For instance, Southern California
Edison issued a Request for Offers to meet their Local Capacity
Requirement, and all three California IOUs are soliciting bids
for these services.228 Independent Power Producers respond to
the bids with their third party owned products and enter into
binding contracts with the utility.229 Hawaii and California
also are both using energy storage procurement mechanisms
225. See, e.g., INT’L ENERGY AGENCY, supra note 100, at 34 (citation omitted).
226. Paul L. Joskow & Richard Schmalensee, Incentive Regulation For Electric
Utilities, 4 YALE J. ON REG. 1 (1986).
227. N. AM. ELEC. RELIABILITY COUNCIL, RELIABILITY ASSESSMENT 1998–2007:
THE RELIABILITY OF BULK ELECTRIC SYSTEMS IN NORTH AMERICA 7 (1998),
www.nerc.com/files/98ras.pdf [https://perma.cc/R6PR-5328] (noting that “more
time will need to be allowed to coordinate and perform these tasks to properly
integrate the new generation to ensure reliability” since these activities are no
longer carried out within a single firm).
228. In accordance with California Public Utilities Commission (CPUC)
Decision (D.) 13-02-015, Southern California Edison Company (SCE) issues this
Local Capacity Requirements Request for Offers (LCR RFO) for incremental
capacity in the West LA Basin and Moorpark Sub-Areas. Local Capacity
Requirements (“LCR”) RFO, SOUTHERN CAL. EDISON, https://www.sce.com/wps/
portal/home/procurement/solicitation/lcr/!ut/p/b1/hc9BDoJADAXQs3gAaXEMwnL
QEYpGVEzAbgwaHEmQUTRyfTHRpdpdk_ebfmDIgOv8Uer8Xpo6r147O7uIJtIO
hgOKfVuhTMidqFBhEjsd2HYAv4zEf_kU-BcZz503sN1AhpQg4WjuIfnLtfI2nnBH
4g28AFUYxUjBZiWQxAoXiZQC8XPhx5MRsK7Mviuc-sDT2ZUr_aom671wNXBT
HIumaKyTud0ha9vW0sboqrAO5gyXc4Yl9Xmqe70n_gNDYg!!/dl4/d5/L2dBISEvZ0
FBIS9nQSEh/ [https://perma.cc/9R8U-YNRS].
229. RAP ELECTRICITY REGULATION, supra note 61, at 62.
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that result in Energy Performance Contracts.230 Where such
reliability resources are built to serve the public and the grid,
there is a certain mutual dependence that leads to fair and
efficient contracts that does not exist for private owners that
create reliability resources for their own use.
In contrast, many of the reliability resources created to
self-serve are not in contract with the utility. In fact, in many
jurisdictions, and depending on the level of charging, a
customer can install his or her own home battery or EV charger
without any utility approval.231 A similar lack of visibility
applies with respect to distributed generation. At least for
these generation resources, however, most of these DERs
submit interconnection requests to connect with the grid,
leaving some sort of a paper trail.232 But it is unclear how
230. See Bill Holmes, Hawaiian Electric Company Extends “Intent to Bid”
Deadline for O’ahu Energy Storage RFP, GLOBAL POWER L. & POL’Y (May 26,
2014),
http://www.globalpowerlawandpolicy.com/2014/05/hawaiian-electriccompany-extends-intent-to-bid-deadline-for-oahu-energy-storage-rfp/
[https://perma.cc/5V38-LKD4]. Energy Performance Contracts are creative
financing mechanisms that invest the cost savings. Energy Performance
Contracting, U.S. DEP’T OF HOUS. & URBAN DEV., http://portal.hud.gov/
hudportal/HUD?src=/program_offices/public_indian_housing/programs/ph/phecc/e
performance [https://perma.cc/9VEZ-RKBQ].
231. Tesla instructs users that “[a] standard electrical permit is generally
required when installing Powerwall. Further, the utility may need to provide
interconnection approval. Please contact your local permitting agency and utility
for
more
specific
details.”
Support:
Powerwall,
TESLA,
https://www.teslamotors.com/support/powerwall
[https://perma.cc/Y7EG-T5TR].
See, e.g., CITY OF ELK GROVE, CITY OF ELK GROVE GUIDE TO ELECTRICAL VEHICLE
SUPPLY
EQUIPMENT
(EVSE)
PERMITS
FOR
RESIDENTIAL,
http://www.elkgrovecity.org/UserFiles/Servers/Server_109585/File/evse-guide.pdf
[https://perma.cc/74BH-PFZP] (“If your home already has the appropriate outlet
(either 120VAC or 240VAC) and you already have or do not need a separate
SMUD meter/sub-meter, a building permit is not required.”).; California requires
Level 2 chargers to obtain an installation permit that includes electrical load
calculations that estimate if an existing electrical service will handle the extra
load. These calculations are usually submitted to the local building and safety
division and it is unclear if this information gets communicated to the utility.
CTR. FOR SUSTAINABLE ENERGY, ELECTRIC VEHICLE CHARGING STATION
INSTALLATION GUIDELINES: RESIDENTIAL AND COMMERCIAL LOCATIONS (2011),
https://energycenter.org/sites/default/files/docs/nav/programs/pev-planning/sandiego/fact-sheets/ResComm%20EVSE%20Permit%20Guidelines%20v3_Final_
attach.pdf [https://perma.cc/7FLG-KDP9]. Other jurisdictions ask that customers
“please” inform the utility, suggesting the lack of mandatory interconnection
requirements. CITY OF ANAHEIM, ELECTRIC VEHICLES – FREQUENTLY ASKED
QUESTIONS, http://www.anaheim.net/584/EV-FAQ [https://perma.cc/2SVZ-TGXQ].
232. Generate Your Own Power, PACIFIC GAS & ELEC., http://www.pge.com/
en/b2b/interconnections/standardnem/resources/process/index.page?WT.mc_id=Va
nity_standardnem [https://perma.cc/DZ8S-JFG5] (“All storage generating facilities
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much communication there is between those who handle
interconnection requests and those who handle the operation of
the grid. Many utilities still are not able to identify the extent
of DER resources available.233 The Energy Information
Administration, one of the primary resources for energy data,
has acknowledged that “[b]ecause electric utilities do not
necessarily know how much electricity is generated by rooftop
PV on their distribution systems, generation from these
systems must be estimated.”234 Similarly, the California PUC
consultants have indicated that “[t]here is a general lack of
monitoring DG [distributed generation] system output and of
the effects of DG systems on the grid (that is, utilities do not
have the appropriate tools to systematically collect and
evaluate data on problems or benefits attributable to DG).”235
If the distributed resource is “behind the meter,”236
meaning it is a generation unit that delivers energy to load
without using the transmission or distribution facilities, it may
very well escape notice. It is usually the case, as it is in the
PJM markets, that it is only when a “behind the meter”
generation wants to be designated, in whole or in part, as a
Capacity Resource or Energy Resource that it must submit a
Generation Interconnection Request to the RTO/ISO.237 An
interconnection request may identify the location of distributed
seeking an interconnection should Apply for Rule 21 application for Non-Export
and NEM-Paired systems (79-974) using our online application form.”); Christine
Hertzog, Integrated Distribution Planning – a Pragmatic Approach to Transactive
Energy, SMART GRID LIBRARY (June 3, 2013), http://www.smartgridlibrary.com/
2013/06/03/integrated-distribution-planning-a-pragmatic-approach-to-transactiveenergy/ [https://perma.cc/A62Y-TWB9].
233. See infra note 235.
234. EIA Electricity Data Now Include Estimated Small-Scale Solar PV
Capacity and Generation, U.S. ENERGY INFO. ADMIN.: TODAY IN ENERGY (Dec. 2,
2015), https://www.eia.gov/todayinenergy/detail.cfm?id=23972 [https://perma.cc/
3VEE-MPZ8].
235. CAL. PUB. UTILS. COMM’N, BIENNIAL REPORT ON IMPACTS OF DISTRIBUTED
GENERATION 1-4 (2013), http://www.cpuc.ca.gov/WorkArea/DownloadAsset.
aspx?id=5103 [https://perma.cc/NT5Y-CFFJ].
236. PJM, PRIMER DEFINITIONS AND DISCUSSION OF REGULATORY ISSUES
(2012),
https://www.pjm.com/~/media/committees-groups/task-forces/nemstf/
20120130/20120130-primer-definitions-and-discussion-of-regulatory-issues.ashx
[https://perma.cc/TP79-WKEQ]. Behind the Meter Generation for which a
Generation Interconnection Request is not required may, however, “be subject to
other interconnection-related requirements of a Transmission Owner or Electric
Distributor with which the generation facility will be interconnected.” Id. at 4
(citation omitted).
237. Id.
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users on the grid, but not the extent to which the resource is
operating on a day-to-day basis. Even if the customer
participates in a net metering program, which is only available
in certain jurisdictions, the utility will generate usage data in
hindsight for billing purposes, but may not have this data
available in real time to incorporate into reliability planning.
As FERC consultants have indicated, “[a]side from the fact that
it is sometimes difficult to estimate the total resource adequacy
value of a particular type of DR program, there is also no
standard approach regarding how these resources are included
in the reserve margin calculation.”238
In short, as the model moves from “make and buy” to
“make and buy plus,” the transaction costs continue to
increase. Now, utilities have an even more difficult time
assessing information about reliability resources. There are few
reliability resource procurement contracts governing these
relationships between the utilities and the consumers. At best,
there are interconnection agreements connecting the utilities
and the generators or DR contracts connecting the customers
and the utilities through markets.
Asymmetric information with respect to reliability
resources can have two primary impacts. First, the party with
more information can take advantage of the situation. The
owners of these distributed resources inevitably have more
information than the utilities responsible for reliability of the
grid. They have better information about their capacity, use,
functionality, and limitations, creating complications for both
planning and use. The transaction cost literature queries
whether these agents (the owners of the reliability resources)
may take advantage of the situation for their own benefit.239
The exception may lie in DR, which as described above, is
aggregated and bid into markets via contracts. As such, an
analysis of control by the utility over these resources requires a
238. FED.
ENERGY
REGULATORY
COMM’N,
RESOURCE
ADEQUACY
REQUIREMENTS: RELIABILITY AND ECONOMIC IMPLICATIONS 8 (Sept. 2013),
https://www.ferc.gov/legal/staff-reports/2014/02-07-14-consultant-report.pdf
[https://perma.cc/6YEP-G8FF] [herinafter RESOURCE ADEQUACY REQUIREMENTS].
Reserve margins reflect the extra capacity that is available during expected peak
demand. Reserve Electric Generating Capacity Helps Keep the Lights On, U.S.
ENERGY INFO. ADMIN.: TODAY IN ENERGY (June 1, 2012), https://www.eia.gov/
todayinenergy/detail.cfm?id=6510 [https://perma.cc/7EWW-RB3V].
239. See, e.g., Gary J. Miller, The Political Evolution of Principal-Agent Models,
8 ANN. REV. POL. SCI. 203 (2005).
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deeper understanding of the contractual commitment that is
being made with DR resources and the degree to which these
information asymmetries may be mitigated. The likelihood for
negative impacts will depend on the unique contractual terms
that will differ across jurisdictions and individual parties. For
instance, even customers with DR capabilities may not share
all of their capabilities with utilities in an effort to achieve
higher compensation for their megawatts. If customers suggest
that their needs are more critical than they are in reality, they
may try to demand a higher price for their DR service.
Furthermore, there is substantial data about a customer’s
usage and capacity to assist in DR efforts that is known to the
customer and not the utility for the entire pre-contract period.
Second, the party with less information may make bad
decisions. Utilities need access to information about what
resources are available for use to help balance the system,
what resources may inject variability, and the limitations of
such resources.240 Reduced visibility makes it more difficult for
the utilities to conduct adequate planning and can lead to
uncoordinated planning and investment decisions. If utilities
are not aware of all of the distributed energy storage resources
that exist, they may be at a disadvantage. Adverse impacts can
include overbuilding in response to reliability concerns when
the need could have been addressed through aggregated
distributed reliability resources.
III. BRIDGING THE GAP BETWEEN OWNERSHIP AND CONTROL OF
RELIABILITY RESOURCES
In short, the separation of ownership and control has been
amplified by the move toward self-supply of reliability. This
separation increases the risks that utilities may be acting on
bad information or not fully capturing the value of distributed
reliability resources. Failing to account for these potential
principal-agent problems has the potential to lead to an
inefficient allocation of resources.241 To address these potential
240. See, e.g., RESOURCE ADEQUACY REQUIREMENTS, supra note 238, at vi
(analyzing the implications of different levels of emergency DR), 4 (explaining
most system operators use reliability modeling to translate reliability standards
into a planning reserve margin, a cushion required of grid operators that varies
depending on the anticipated resource mix and weather uncertainty).
241. Gillingham et al., supra note 106 (noting the potential for inefficient
allocation of resources with respect to energy efficiency).
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problems, this Part addresses a number of responses to the
reliability challenges of this separation between ownership and
control. Many of these responses involve mechanisms to help
reconnect the utilities in charge of reliability of the grid with
customers owning private reliability resources. It acknowledges
the unlikely response of reverting back to a partial vertical
integration of reliability resources, but focuses on the
approaches that assume continued deintegration.
If reliability resources continue to be owned and operated
by individual customers, then the legal regime governing the
electric grid needs to have a corresponding realignment in the
way that utilities and customers interact. Oliver Williamson’s
seminal work on transaction costs noted the two objectives of
governance: “(1) protect the interests of the respective parties
and (2) adapt the relationship to changing circumstances.”242
Nowhere is this relationship in need of more adapting than in
energy.
One approach to adapting the relationship could involve a
heightened responsibility on the part of customers. As
individual
customers—residential,
commercial,
and
industrial—begin to self-supply their own reliability, they may
need to ratchet up their involvement in the reliability of the
grid. Individual customer involvement in reliability can come
in at least two forms. First, individual customers could be
added to the long list of entities sharing some responsibility for
reliability. Efforts to impose such legal responsibility on
individual customers are likely to fall flat. The first obvious
tension in such a proposal lies in its potential to counteract the
extensive incentives currently in place to encourage DER. As
discussed above, many states have developed incentive
programs to encourage distributed generation and/or reliability
resources and if investment in such devices triggers exposure
to some sort of liability for outages, far fewer customers would
invest.
A second problem with this idea is that customer-owned
DERs will not lie on the bulk energy portion of the grid,
negating application of North American Electric Reliability
Corporation (NERC) reliability standards that only apply to
“users” of the bulk energy grid.243 Instead, these customer242. Oliver E. Williamson, Transaction Cost Economics: The Governance of
Contractual Relations, 22 J.L. & ECON. 233, 258 (1979).
243. See N. AM. ELEC. RELIABILITY CORP., COMPLIANCE MONITORING AND
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owned DERs lie on the distribution portion of the grid,
rendering jurisdiction to the states and public utility
commissions with questionable jurisdiction over individual
customers.
Furthermore, any efforts to shift some of the responsibility
away from utilities would not help to reduce the
responsibilities of the utility. Instead, they would merely add
another entity with some responsibility for reliability in
addition to the already fragmented list of authorities.244 For
instance, when imposing reliability requirements on the ISO
for the California region, the public utility commission
maintained that
[w]hile § 345 clearly assigns the CAISO [California
Independent System Operator] responsibility for ensuring
reliable grid operations, this statutory obligation does not
diminish in any respect the utilities’ obligation to procure
resources for their loads to ensure reliability. To be clear, it
is our view that while the CAISO has the responsibility to
ensure and maintain reliable grid operations, it is the LSEs’
[load-serving entities’] responsibility to have sufficient and
appropriate resources to make that reasonably possible.245
Instead of imposing some sort of individual liability for
reliability deficits, a much more palatable approach would be to
focus on regulatory and contractual terms to negotiate the
boundaries of private resources for public use. This Part makes
regulatory recommendations that reconnect the utilities and
the owners in a manner that will enhance private development
of reliability resources. Such an approach would include a
recognition that individual customers involved in DER have
some role to play in assisting the utilities in meeting their
ENFORCEMENT PROGRAM 2012 ANNUAL REPORT 11 (2013), http://www.nerc.com/
pa/comp/Reports%20DL/2012_CMEP_Report_Rev1.pdf
[https://perma.cc/35Y2E7SK].
244. Jurisdiction over reliability falls to many entities, including utilities,
public service commissions, regional grid operators, and federal agencies. See, e.g.,
NARUC, RESOLUTION RELATING TO THE FEDERAL/STATE JURISDICTIONAL
BOUNDARIES IN SETTING GENERATION RESOURCE ADEQUACY STANDARDS (2005),
http://www.naruc.org/Resolutions/FederalStateBoundaries_s0705.pdf
[https://
perma.cc/L9LA-XGMG].
245. Peter W. Hanschen & Gordon P. Erspamer, A Public Utility’s Obligation
to Serve: Saber or Double-Edged Sword?, ELEC. J. (Dec. 2004),
http://media.mofo.com/docs/pdf/eleCTR.pdf [https://perma.cc/Z5XH-9CA7].
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reliability obligations above and beyond the private reliability
benefits that might be provided by such self-supply.
This Part proposes concrete mechanisms to bridge the gap
between separation and control, urging more visibility and
coordination between utilities and private reliability resource
owners. At the very least, grid operators need better visibility
of the location and capabilities of these private resources to
assist in resource planning. A more effective approach,
however, would empower grid operators to harness some of
these private resources for public use. It would not be
appropriate to consider these alternatives without also
acknowledging the potential for the utility to revert back to a
partially integrated model by owning such reliability resources
itself. This Part addresses each in turn, urging regulatory
requirements that assist the utilities in their efforts to
maintain the reliability of the grid.
A.
Increasing Visibility of Private Reliability Resources
There are real challenges for a grid that increasingly relies
on distributed reliability resources that are not only outside of
the control of the utilities, but out of their line of sight. As
described above, utilities do not have full access to the same
information that the individual customers do. Yet utilities are
obligated to engage in resource planning, developing forecasts
to predict electricity needs three years out, a day ahead, and on
an hourly basis.246 As a result, this Section urges that steps be
taken to increase the visibility of reliability resources for grid
operators.
A first option to enhance visibility is through registration
of reliability resources. Owners of distributed reliability may
follow the model established by the North American Electric
Reliability Corporation, which requires that all users of the
bulk energy grid register with NERC.247 “Inclusion on the NCR
[National Compliance Registry] indicates responsibility for
compliance with NERC Reliability Standards.”248 As of the end
246. See, e.g., VA. STATE CORP. COMM’N, INTEGRATED RESOURCE PLANNING
GUIDELINES, https://www.scc.virginia.gov/pue/docs/irp.pdf [https://perma.cc/399E66JJ]; Nancy Brockway, Utility Planning: Pitch-Perfect Description, SCOTT
HEMPLING LAW (Dec. 2011), http://www.scotthemplinglaw.com/blog/utilityplanning-pitch-perfect-description [https://perma.cc/3PC4-R9GX].
247. See N. AM. ELEC. RELIABILITY CORP., supra note 243.
248. Id.
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of 2012, 1,922 entities were registered with NERC across the
country.249 Here, the resources could become “registered” in a
more comprehensive sense than the interconnection application
that is filed with the local distribution utility but less than
actual registering with NERC and triggering compliance
obligations. It may be as simple as notifications of capabilities
and functionalities with the relevant utility.
A second option for enhancing visibility of these resources
without mandating their registration is through rebates.
California, for instance, offers rebates for qualifying
investments in energy storage and other reliability resources.
To obtain this rebate, customers need to document the
installation of the device.250 “The incentives will apply only to
the portion of the generation that serves a project’s on-site
electric load.”251 Inclusion in the program becomes part of the
SGIP Quarterly Statewide reports, which includes the type and
rated capacity of each resource in the program.252 Minor
modifications to such programs could assist in the effort,
including incentives like premium rebates for those who
provide additional data on storage usage in real time.
A third option is to pursue further automation of the grid.
California, for instance, has recognized the need for the more
expensive “production meters,” as opposed to mere “net
meters,” devices that provide much better visibility in real-time
about the functionality, use, and effectiveness of various
distributed resources. California companies are even
contemplating using satellite imaging to garner a better
understanding of the private resources being employed for
energy services.253
It is questionable whether the benefits of enhanced utility
249. Id.
250. Self-Generation Incentive Program, CAL. PUB. UTILS. COMM’N,
http://www.cpuc.ca.gov/General.aspx?id=5935 [https://perma.cc/9U6D-V33P].
251. CPUC Improves and Streamlines Self-Generation Incentive Program, CAL.
PUBLIC UTILS. COMM’N (Sept. 8 2011), http://docs.cpuc.ca.gov/PUBLISHED/
NEWS_RELEASE/142914.htm [https://perma.cc/U9RP-6952].
252. Self-Generation Incentive Program, supra note 250 (click on “Quarterly
Projects Report”).
253. Jeff St. John, Transforming Rooftop Solar From Invisible Threat to
MEDIA
(Oct.
21,
2013),
Predictable
Resource,
GREENTECH
http://www.greentechmedia.com/articles/read/Turning-Rooftop-Solar-fromInvisible-Threat-to-Predictable-Resource [https://perma.cc/CM2R-4ZYZ] (noting
attempts to use PV interconnection data and satellite weather to create
“geographically precise predictions” of distributed generation status).
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visibility and/or use exceed the costs of monitoring and
integration. Enlisting the assistance of multiple small sources
may be inefficient due to high transaction costs. In one sense,
they may be largely irrelevant to utility planning, either
because there are so few of them with such a small impact or
because a utility generally plans according to its peak load for
all customers in their service territories. Planning for peak
loads would arguably include meeting the needs of DER
customers should their private resources fail. Private use of
these resources does not absolve the utility of their reliability
responsibilities.
But in another sense, these DER resources can be an
important component of the utility toolkit to satisfy their grid
needs. As others have noted, “[s]cheduling and dispatching
generation to meet load, ensuring sufficient reserve capacity,
balancing the grid in real time, and maintaining reliability
clearly require some form of central administration—whether
it be from systems operators in the vertically integrated
utilities, regional balancing authorities, or ISOs and RTOs in
the organized markets.”254 Such activities are only as effective
as the information relied on to develop them. As will be
discussed below, the answers to these complicated questions
may hinge, in large part, on whether the owner of the private
DER seeks to use these resources for purely private or dual
purpose (private and public) use.
Increasing visibility can take the form of more
transparency among utilities and individuals and corporate
entities relying on energy storage devices. This transparency
can come in the form of incentives or mandated registrations of
reliability resources with appropriate authorities. If electric
vehicles continue to flourish, this will become increasingly
important as policymakers contemplate their use as mobile
batteries to support the grid. Although visibility is more of a
concern for noncontractual resources like energy storage,
accounting for DR resources can be improved as well, allowing
regulators access to latent or unidentified resources.
254. William Boyd, Public Utility and the Low-Carbon Future, 61 UCLA L.
REV. 1614, 1700 (2014).
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Coordinating Customer Reliability Resources
Enhanced coordination is one of the buzzwords associated
with this fragmented grid. For instance, most of the smart grid
initiatives to modernize and automate the electric grid have a
similar focus on coordination and better “situational
awareness.255 Similarly, Professor William Boyd has called for
a broader conception of public utilities that realizes the value of
planning, coordination, and innovation in the move to a lowcarbon grid.256 Part of his theory urges closer coordination, in
part, to address reliability concerns.257 Such coordination is
complicated by jurisdictional boundaries, however, since much
of the smart grid equipment being installed on distribution
facilities does not fall under FERC’s jurisdiction, but under
state jurisdiction.258 These jurisdictional dividing lines between
FERC and the states (that oversee local distribution facilities)
necessitate a continuous dialogue to share information and
raise awareness about threats and vulnerabilities to the
electric grid at both the transmission and distribution level.
Similarly, the modern theory of the firm focuses on the need for
cooperation to achieve common goals, particularly in light of a
nonintegrated organizational structure.259
One mechanism to enhance coordination between the
utilities and private reliability resource owners is through the
creation of a centralized distribution grid operator. This would
be quite a departure from the current distribution system,
which does not involve a centralized coordinator, but relies on
piecemeal utility jurisdiction. Such a centralized distribution
operator could come in many forms. Former FERC
Commissioner Jon Wellinghoff and James Tong, Vice President
of Strategy and Government Affairs at Clean Power Finance,
presented one option. They proposed the creation of an
Independent Distribution System Operator (IDSO), an RTOlike entity to coordinate distribution reliability and handle the
255. See Khosrow Moslehi & Ranjit Kumar, A Reliability Perspective of the
Smart Grid, 1 IEEE TRANSACTIONS ON SMART GRID 1 (2010).
256. Boyd, supra note 254.
257. Id.
258. See, e.g., CAL. PUB. UTIL. CODE §§ 8360–8369 (West 2015); ME. REV. STAT.
ANN. tit. 35-a, § 3143 (West 2015); see also Dennis L. Arfmann, Tiffany Joye, &
Eric Lashner, The Regulatory Future of Clean, Reliable Energy: Increasing
Distributed Generation, 40 COLO. LAW. 31, 34–35 (Oct. 2011).
259. See Williamson, supra note 36, at 175.
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planning and operations of the distribution network in charge
of reliability.260 Just as FERC has control over RTO/ISOs at
the wholesale level, Wellinghoff envisions state public utility
commissions controlling an independent distribution system
operator on the retail level.261 Importantly, such an IDSO
would maintain system safety and reliability.262 An IDSO also
“would eliminate distribution system encumbrances for
regulated utilities” and “free them from some reliability
burdens.”263
This proposal has substantial merit, as distribution
utilities will have an increasingly important role to play in a
more distributed, resource-laden environment.264 These
distribution-only utilities either buy their power from one or
more upstream wholesale providers, or, in the restructured
states, consumers may obtain their power directly from
suppliers, with the utility providing only the distribution
service.265 “A significant number of [consumer-owned utilities]
do own some of their own power resources, which they augment
with contractual purchases, market purchases, and/or
purchases from [generation and transmission cooperatives].”266
260. JON WELLINGHOFF ET AL., THE 51ST STATE: MARKET STRUCTURES FOR A
SMARTER, MORE EFFICIENT GRID (2015); see Paul De Martini & Lorenzo Kristov,
Operating the Integrated Grid, INTELLIGENT UTILITY (July 6, 2014),
http://www.intelligentutility.com/article/14/07/operating-integrated-grid [https://
perma.cc/7YBT-SKZP].
261. Herman K. Trabish, Jon Wellinghoff: Utilities Should Not Operate the
DIVE
(Aug.
15,
2014),
Distribution
Grid,
UTILITY
http://www.utilitydive.com/news/jon-wellinghoff-utilities-should-not-operate-thedistribution-grid/298286/ [https://perma.cc/7J4B-PQ3F].
262. Id.; De Martini & Kristov, supra note 260 (“[T]he core operational safety
and reliability based DSO activities confine it to managing real and reactive
power flows across the distribution system. These activities require tight
integration of the people, resources, processes and technology used to operate the
distribution system.”); GREENTECH LEADERSHIP GRP., supra note 121, at 18. The
creation of an IDSO can provide not only a repository for some share of the
responsibility over reliability, but can assist in overcoming the coordination
problems caused by the increasing separation of ownership and control. It is
contemplated to provide a transmission-distribution interface reliability
coordination. Id.
263. Trabish, supra note 261.
264. The large numbers of distributed resources that must be coordinated
under such a proposal dwarfs the number of resources each RTO/ISO currently
coordinates, however, suggesting large transaction costs.
265. See RAP ELECTRICITY REGULATION, supra note 61, at 10 (“Consumerowned utilities, including munis, co-ops, and public power districts, are often
distribution-only entities”).
266. Id. at 13.
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Many of these distributed resources will be interconnected in
the distribution part of the grid, suggesting enhanced
coordination benefits from an IDSO.267
A second option for a centralized distribution coordinator
has been discussed by New York’s REV proposal.268 New York
has recognized the “pivotal role” that will be played by
distribution utilities “representing both the interface among
individual customers and the interface between customers and
the bulk power system.”269 Accordingly, it is calling for
distribution utilities to transform into distributed energybalancing platforms called Distributed System Platform
Providers (DSPPs), which will actively coordinate customer
activities.270 Similar to the proposal for an IDSO, this proposal
also contemplates more effective use of solar and DER to
“provide service to the grid, thereby enhancing reliability and
resiliency and earning money.”271 In a similar effort to enhance
coordination on the distribution grid, California recently
passed AB 327, a law that requires, among other things, that
the state’s private utilities complete Distribution Resources
Plans by mid-2015.272 These plans will recalibrate how utilities
plan for and interconnect new distributed power generation
and other DERs like DR and energy efficiency.273
In addition to a centralized distribution coordinator,
another example of creative coordination can be found in the
California ISO (CAISO), the grid operator for most of
267. If the allocation of responsibility toward RTOs/ISOs is any indication,
however, there may be similar reluctance to hold the IDSO legally responsible for
reliability failures. Courts have generally been reluctant to hold RTO/ISOs
financially liable for outages, relying in part on their nonprofit status. If the IDSO
is similarly structured as a nonprofit entity, then the rationale for not imposing
substantial penalties may apply with equal force here. Would there be adequate
incentives for the IDSO to shoulder some of the responsibility that is traditionally
borne by the utilities without penalties?
268. See supra note 127.
269. NYS DEP’T OF PUB. SERV., REFORMING THE ENERGY VISION 9 (2014),
http://www3.dps.ny.gov/W/PSCWeb.nsf/96f0fec0b45a3c6485257688006a701a/26be
8a93967e604785257cc40066b91a/$FILE/ATTK0J3L.pdf/Reforming%20The%20En
ergy%20Vision%20(REV)%20REPORT%204.25.%2014.pdf
[https://perma.cc/
7MRM-ME7W].
270. See Order Adopting Regulatory Policy Framework and Implementation
Plan, supra note 127, at 31.
271. See FED. ENERGY REGULATORY COMM’N, supra note 238, at 9.
272. Assemb. B. 327, 2013 Gen. Assemb., Reg. Sess. (Cal. 2013),
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140AB3
27 [https://perma.cc/4Y9R-PRPV] (all three have submitted their plans).
273. Id.
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California. CAISO’s energy imbalance market is used to
procure electricity to cover unscheduled real-time mismatches
between supply and demand.274 A few utilities that exist
outside of the ISO region, including NV Energy, PacifiCorp,and
Puget Sound Energy, are finding it difficult to balance their
reserves.275
Fluctuations in renewable energy generation, which can
occur suddenly and frequently within an hour, are difficult
for western grid operators to manage because of the limited
pool of generation resources under their control and the
relatively infrequent dispatch of generators on an hourly
basis. These fluctuations require western grid operators to
maintain higher levels of extra power reserves to cover
unexpected changes in supply and demand and ultimately
lead to higher power prices.276
Even though these utilities exist outside of their service
area, CAISO has agreed to provide imbalance services.277 “By
adding [PacifiCorp’s] generation resources to the resource pool
of the [CAISO] to meet subhourly electricity imbalances,
PacifiCorp anticipates enhanced reliability and cost savings,
particularly in the face of higher levels of renewable energy
generation in the West.”278 This marks the first time that
CAISO will dispatch electricity for regions lying outside of its
footprint. Although PacifiCorp will retain all of its normal grid
reliability and transmission service responsibilities after
274. See EIM FAQ: Expanding Regional Energy Partnerships, CAL. ISO (Aug.
2015), https://www.caiso.com/Documents/EIMFAQ.pdf [https://perma.cc/E632R87W].
275. Puget Sound Energy to Join CAISO’s Energy Imbalance Market,
SANDERS
LLP:
WASH.
ENERGY
REP.
(Mar.
2015),
TROUTMAN
http://www.troutmansandersenergyreport.com/2015/03/puget-sound-energy-tojoin-caisos-energy-imbalance-market/ [https://perma.cc/B655-FSLZ].
276. April Lee & Bill Booth, California Subhourly Wholesale Electricity Market
Opens to Systems Outside Its Footprint, U.S. ENERGY INFO. ADMIN.: TODAY IN
ENERGY (Sept. 30, 2014), http://www.eia.gov/todayinenergy/detail.cfm?id=18191
[https://perma.cc/24U6-L2JR].
277. Currently, thirty-eight electricity balancing authorities balance electricity
supply and demand in their portions of the western North American grid and
coordinate their operations with neighboring balancing authorities. Western
INTERSTATE
ENERGY
BOARD,
Electricity
Coordinating
Council,
W.
http://westernenergyboard.org/reliability/western-electricity-coordinating-councilwecc/ [https://perma.cc/LUW8-26BM].
278. Lee & Booth, supra note 276.
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joining the imbalance market,279 this helps shift some of the
reliability concerns from the utility to the ISO.
C.
Contracting Customer Resources for Public Purposes
A third approach to mitigate against possible transaction
costs associated with distributed reliability resources is the use
of
contracts.280
Economists
might
urge
contracting
arrangements or control systems to mitigate agency-related
problems and provide “incentives to reconcile differences so
that efforts are coordinated toward the established objectives of
the organization.”281 Williamson’s focus on economics as the
“science of contracts” as opposed to the “science of choice” leads
one to conclude that the “best contract is one that aligns the
interests of principal and agent as much as possible.”282
Such contractual arrangements may be effective in
determining the potential for private reliability resources to
serve the public beyond the individual customer’s needs. For
example, utilities could contract with private distributed
energy storage resource owners to authorize use of their
reliability resources when the individuals are not using them.
Such contracts could allow for specific terms related to times of
use, amounts, preferences for private use, and compensation,
akin to those used for DR.283 Public use of electric vehicle
batteries might provide a model for such agreements. As others
have indicated, providing an entity with the “ability to use
locally-provided reliability services will also enable it to
maintain a more stable and predictable interchange” with
transmission operators.284 The value of contracting for these
reliability resources is also evidenced by the growth of thirdparty businesses that provide energy storage resources to
commercial customers to minimize their demand charges.285
279. Id.
280. Although contracts are imbued with their own transaction costs, within
certain organizational structures they may be less than the transaction costs
associated with not contracting.
281. ARWINGE, supra note 207.
282. Williamson, supra note 36, at 172; INT’L ENERGY AGENCY, supra note 100,
at 11.
283. See, e.g., CLEARLY ENERGY, https://www.clearlyenergy.com/residentialdemand-response-programs [https://perma.cc/7236-76J2] (providing a list of DR
programs).
284. De Martini & Kristov, supra note 260.
285. See, e.g., GREENCHARGE NETWORKS, http://www.greencharge.net/
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Such contracts could also help to realign utility and private
resource goals with respect to these reliability resources.286
The latest contractual innovation in this area is being
discussed by the California ISO (CAISO) with regards to
aggregation of individual customer resources for sale into the
wholesale energy markets.287 In June 2015, CAISO issued a
final draft proposal allowing private DER owners to sell into
the CAISO’s electricity market.288 The framework of the
proposal is to enable private DER providers (DERPs) to
aggregate their DER to reach the CAISO’s minimum
participation requirement of 0.5 megawatts so that owners can
participate in the electricity wholesale market.289 Each DERP
will be obligated under the CAISO’s tariff to ensure that the
DER under its control will participate in the energy or
ancillary services market by using a scheduling coordinator,
who is formally responsible for “bidding, scheduling and
settling resources in the ISO market.”290
This adopted proposal exemplifies both the value and
transparency of the trend toward independent contracting of
[https://perma.cc/8P7Y-GW65] (contracting with companies like Walmart to
provide storage).
286. As Coase has noted, however, external transactions (the “buy” structure)
can lead to inefficiencies because it is difficult to write contracts that fully specify
what should happen in future situations that are hard to foresee. Coase, supra
note 37, at 391. In fact, firms often integrate to protect themselves against such
“incomplete contracts.” Bruce R. Lyons, Incomplete Contract Theory and Contracts
Between Firms: A Preliminary Empirical Study 16 (Ctr. For Competition &
Regulation, Working Paper No. CCR 01-1, 2001), http://competitionpolicy.ac.uk/
documents/8158338/8199514/ccp1-1.pdf/0028c37c-1a57-4594-88e3-b1f9ccf82936
[https://perma.cc/7YRF-SNAJ].
287. See generally California ISO, Expanded Metering and Telemetry Options
Phase 2: Distributed Energy Resource Provider (DERP) (June 10, 2015)
(unpublished
draft
final
proposal)
[hereinafter
CAISO
Proposal],
http://www.caiso.com/Documents/DraftFinalProposal_ExpandedMetering_Teleme
tryOptionsPhase2_DistributedEnergyResourceProvider.pdf
[https://perma.cc/7D8E-QPPC].
288. See id. This proposal was subsequently adopted by CAISO’s Board,
making it the first grid operator in the United States to purchase aggregated
DER. Herman K. Trabish, CAISO Approves Plan to Aggregate and Market
DIVE
(July
20,
2015),
Distributed
Energy
Resources,
UTILITY
http://www.utilitydive.com/news/caiso-approves-plan-to-aggregate-and-marketdistributed-energy-resources/402500/ [https://perma.cc/3R5F-JYVL].
289. CAISO Proposal, supra note 287, at 5.
290. Id. at 12 n.3. All DERs are required to have revenue quality metering to be
a part of the CAISO market for services it either provides or consumes. Id. at 13.
The DERP aggregations will be constrained to “a single sub load aggregation
point” to reduce congestion and price divergence. Id. at 16.
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DER. Consumers producing DER are allowed to play a more
active role in electricity generation, as companies choosing to
become DERPs may pay consumers for their electricity to
bundle the DER to meet the wholesale market threshold.291
DERPs also have flexible options in meeting the proposal’s
requirements.292
CAISO, the grid operator, benefits from the proposal as
well. It gains valuable generation from DER while preventing
many of the issues with individual contracting for solar
resources posed by its market regulations. For example, mixing
sub-resources across multiple price nodes is prohibited to limit
the “adverse effects” that CAISO may have in accurately
assessing congestion and critical constraints.293
Additionally, this proposal provides greater transparency
to the grid operators. Each DERP will provide, and timely
update, the operator “with accurate information for the DER it
controls, . . . includ[ing] changes to resource attributes as well
as accurate meter and telemetry data” and all “operational and
technical characteristics.”294 The scheduling coordinators for
CAISO and each DERP will meet with each other to adhere to
the proposal’s requirements, and the proposal lays out several
methods for a DERP to meet its data-providing
requirements.295 The scheduling coordinator for each DERP is
also required to conduct self-audits each year, in an effort by
291. Mark Chediak & Jonathan N. Crawford, Californians, Love Thy Neighbor
as One May Power Your Dryer, BLOOMBERG BUSINESS (July 17, 2015, 6:18 PM),
http://www.bloomberg.com/news/articles/2015-07-16/california-will-allow-bundledrooftop-solar-in-wholesale-market [https://perma.cc/JR3L-H336].
292. One option for metering that is provided for DERPs sidesteps a significant
burden associated with direct metering. This option, conducted by the scheduling
coordinator, avoids the necessity of direct metering for sub-resources in DERP
aggregation, presumably reducing metering costs and increasing efficiency.
DERPs are not limited in the amount of sub-resources they possess, except in
limited circumstances with a cap of 20 megawatts, and may mix sub-resource
types within one pricing node. CAISO Proposal, supra note 287, at 13–14; 17–18.
293. Id. at 19. The sub-resources within an aggregation may either be for
generation, energy storage, or “load whose performance is direct measured rather
than assessed under a baseline methodology.” Id. For example, CAISO’s current
software cannot model congestion relief for different resources, so it would
interfere with its calculations and analyses before it sends out dispatch orders to
gather energy. Jeff St. John, California’s Plan to Turn Distributed Energy
Resources into Grid Market Players, GREENTECH MEDIA (June 12, 2015),
http://www.greentechmedia.com/articles/read/californias-plan-to-turn-distributedenergy-resources-into-grid-market-play [https://perma.cc/N5WN-X32P].
294. CAISO Proposal, supra note 287, at 12–13.
295. See id. at 22–26.
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the CAISO to promote transparency.296 Moreover, under this
agreement, the operation of the DER must be conducted
pursuant to the relevant ISO tariff provisions and operating
procedures.297
Compliance with such contractual agreements to allow
utilities access to private resources for public use also can be
managed through financial penalties. DR resources, for
instance, face penalties for failing to reduce load when called
upon by the RTO/ISO.298 Similarly, peaker plants that are
procured for utility use are responsible for meeting their
contractual obligations and making sure the peaker plants
work, but not for the operational reliability of the grid itself.
Arguably, energy storage owners may have even greater
obligations to the grid due to their greater interconnectedness.
Peaker plants are relatively inactive players in the energy
industry, only called upon infrequently. Energy storage, on the
other hand, contemplates a repeated extraction and injection of
electricity into the grid, suggesting a more integral component
of this complicated machine called the grid. By that rationale,
DR owners may be less responsible than energy storage owners
as they are only one-directional, reducing their usage of the
grid when needed, but not injecting electricity back into the
grid.
Another variation of such agreements might involve utility
incentive payments to specific customers that can provide
essential reliability benefits. For instance, microgrids like
Princeton and owners of rooftop solar, which have the capacity
to island themselves from the grid during times of blackouts
without injuring utility workers seeking to restore power, could
be paid for reliability services rendered. This resiliency is more
of the exception than the rule, since most homes equipped
with solar panels do not maintain power during
blackouts.299 Although solar panels are particularly resistant
296. See id. at 14.
297. Id. at 13.
298. Electric Grid Reliability: Hearing Before the S. Comm. on Energy and Nat.
Res.,
113th
Cong.
94
(2014),
http://www.gpo.gov/fdsys/pkg/CHRG113shrg87851/pdf/CHRG-113shrg87851.pdf [https://perma.cc/JQF6-Y4CK] (noting
DR resources face substantial penalties should they fail to reduce when called
upon by PJM to do so).
299. Does Solar Work in a Blackout?, THIRD SUN SOLAR (May 29, 2013),
http://thirdsunsolar.com/does-solar-work-in-a-blackout/ [https://perma.cc/8SMFH3BZ].
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to extreme weather such as hurricanes,300 power lines from
residential solar panels must be shut down in order to
prevent electrocution of utility workers attempting to repair
lines.301
Recognizing that these DERs can provide a variety of
reliability benefits may also help alleviate the growing tension
between
utilities
and
individuals
over
distributed
302
generation.
Utilities have referred to this development as a
“death spiral” for the utility, one where decreased utility sales
will result in decreased creditworthiness.303 Although solar
energy still provides less than 1% of our electricity generation
in the United States, multiple analyses anticipate significant
growth in this area.304 Analysts project the penetration of
distributed generation (DG) to continue, particularly in light of
the precipitous decline in the cost of solar photovoltaic (PV)
installations.305 Some utilities have responded with intense
lobbying of state legislators to impose a surcharge on these
solar users for their continued reliance on the utility
infrastructure for back-up services.306
300. See David J. Unger, Are Renewables Stormproof? Hurricane Sandy Tests
Solar, Wind, CHRISTIAN SCI. MONITOR (Nov. 19, 2012), http://www.csmonitor.com/
Environment/Energy-Voices/2012/1119/Are-renewables-stormproof-HurricaneSandy-tests-solar-wind [https://perma.cc/GZ4T-SZZS].
301. Id.
302. RYAN EDGE ET AL., UTILITY STRATEGIES FOR INFLUENCING THE
LOCATIONAL
DEPLOYMENT
OF
DISTRIBUTED
SOLAR
(2014),
http://www.solarelectricpower.org/media/224388/Locational-DeploymentExecutive-Summary-Final-10-3-14.pdf [https://perma.cc/EEM4-AFUD].
303. Peter Kind, Disruptive Challenges: Financial Implications and Strategic
Responses to a Changing Retail Electric Business, EDISON ELECTRIC INST. (2013),
http://www.eei.org/ourissues/finance/documents/disruptivechallenges.pdf
[https://perma.cc/V7LM-Y89M].
304. See, e.g., U.S. ENERGY INFO. ADMIN., RENEWABLES AND CARBON DIOXIDE
EMISSIONS
(2015),
http://www.eia.gov/forecasts/steo/report/renew_co2.cfm
[https://perma.cc/2FNZ-UK48] (“EIA expects continued growth in utility-scale
solar power generation, which is projected to average almost 80 gigawatthours
(GWh) per day in 2016. Despite this growth, solar power averages only 0.7% of
total U.S. electricity generation in 2016”).
305. Id. But see Ashley Brown & Jillian Bunyan, Valuation of Distributed
Solar: A Qualitative View, 27 ELEC. J., 27 (2014), http://www.sciencedirect.com/
science/article/pii/S1040619014002589 [https://perma.cc/N224-XS9S] (arguing
that DG is overvalued); Moslehi & Kumar, supra note 255 (arguing that as DERs
grow, so will the “flattened” load, forcing optimal asset utilization that will push
the system closer to the “edge” more often and thus make it more susceptible to
failure).
306. Brian Skoloff, Arizona Solar Energy Fight Ends with $5 Monthly Fee,
Major Win for Renewable Power Industry, HUFFINGTON POST (Nov. 15, 2013,
11:01 AM), http://www.huffingtonpost.com/2013/11/15/arizona-solar-energy-fight-
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In lieu of such surcharges, perhaps private DER owners
could instead provide specific reliability benefits to utilities.307
Utilities are even starting to conduct pilot projects that assess
the ability of distributed solar to function as a reliability
resource.308 Community solar, where solar panels are
aggregated in one location for local use, is growing most quickly
in areas with large amounts of renters or others who cannot
capitalize on solar on their own rooftops. The most detailed
plans for community storage may exist in New York.309 If
strategically located, community solar arrays could provide
distribution system benefits. This is not a universally
recognized value, however, as it depends on placement, design
configurations, and existing penetration levels.310
D.
Utility Ownership of Reliability Resources
A last approach to rectify the challenges of customerownership of reliability resources is for the utilities to revert
back to a more partially vertically integrated structure and
“make” the reliability resources.311 Although avoided
transaction costs are unlikely to be enough to push a firm to
reintegrate, where those transaction costs prevent a firm from
realizing the full benefits of its investments, there may be
ends_n_4282220.html [https://perma.cc/7AEY-56X9].
307. See generally, Jennifer Klein, Maine’s Solar Bill and the Value-of-Solar
L.
SCH.:
CLIMATE
L.
BLOG
(Aug.
4
2015),
Debate,
COLUM.
http://blogs.law.columbia.edu/climatechange/2015/08/04/maines-solar-bill-and-thevalue-of-solar-debate [https://perma.cc/3ELV-9FK5]; INT’L RENEWABLE ENERGY
AGENCY, THE SOCIO-ECONOMIC BENEFITS OF SOLAR AND WIND ENERGY (2014),
http://www.irena.org/DocumentDownloads/Publications/Socioeconomic_benefits_s
olar_wind.pdf [https://perma.cc/Y2RH-LN4V] (noting the reliability benefits of
distributed solar generation).
308. See generally Peregrine Energy Group, SOLAR PV FOR DISTRIBUTION GRID
SUPPORT
(2014),
http://www.energy.ri.gov/documents/SRP/RI-SRPPV_Report_Peregrine-team_07-16-2014.pdf [https://perma.cc/Z2CV-N66H] (a joint
effort by National Grid and the Rhode Island Office of Energy Resources to
evaluate the ability of distributed solar to provide reliability services).
309. Herman K. Trabish, Inside New York’s Aggressive New Community
DIVE
(July
30,
2015),
Shared
Renewables
Program,
UTILITY
http://www.utilitydive.com/news/inside-new-yorks-aggressive-new-communityshared-renewables-program/402896/ [https://perma.cc/D3HY-2M8G].
310. SOLAR ELEC. POWER ASS’N, UTILITY COMMUNITY SOLAR HANDBOOK 6
(2013) http://www.solarelectricpower.org/media/71959/solarops-community-solarhandbook.pdf [https://perma.cc/9K2T-L6PQ].
311. As is evident from the previous discussion, a “make” model would not
include DR resources since the utility never produced these resources internally.
See supra Section II.A.2.
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reason to investigate options for mitigating these costs.312
Oncor, the distribution utility for Texas, provides an example
of the relative efficiencies of a utility-owned energy storage
project void of any separation between ownership and control.
Oncor recently announced its intent to pursue the largest
single energy storage proposal to date, proposing to install
5,000 megawatts of battery energy storage on the Texas grid,
which would provide a seven percent increase in the capacity of
the Texas grid.313 In yet another fascinating example of the
“make or buy” phenomenon, Oncor’s research demonstrated
that such storage would not be cost effective if purchased by an
independent power producer participating in Texas’s market
but that by owning the storage itself, it would be able to
capitalize on the multi-functional nature of the storage (e.g.,
include the benefits of deferrals in transmission line
investment), as opposed to the narrower benefits recognized in
markets alone.314 As a result of such “benefit[s]-stacking,”315
the utility claims it is able to absorb the massive $5.2 billion
investment at a savings to Texas ratepayers.316
As with the rest of the country, Texas unbundled its
utilities during restructuring, resulting in a legal separation
between generation transmission and distribution, and
electricity retailers, thereby breaking up the vertically
312. Mark Gottfredson et al., How Utilities Should Evaluate Upstream and
Downstream Integration (Feb. 20, 2013), http://www.bain.com/publications/
articles/how-utilities-should-evaluate-upstream-and-downstream-integration.aspx
[https://perma.cc/6ZGT-UQWE] (noting that avoided transaction costs make up
less than 5% of a plant’s net present value, but that they could tip the scales in a
close case).
313. Robert Fares, Three Reasons Oncor’s Energy Storage Proposal is a Game
Changer, SCI. AM. (Nov. 18, 2014), http://blogs.scientificamerican.com/pluggedin/2014/11/18/three-reasons-oncors-energy-storage-proposal-is-a-game-changer/
[https://perma.cc/EQ35-FAW7]. This stands in stark contrast to the California
requirement of 1,300 megawatts. Texas’s grid currently has a total electric
generating capacity of approximately 69,000 megawatts.
314. THE BRATTLE GROUP, THE VALUE OF DISTRIBUTED ELECTRICITY STORAGE
IN TEXAS (2014).
315. INT’L ENERGY AGENCY, TECHNOLOGY ROADMAP: ENERGY STORAGE 12
(2014),
http://www.iea.org/publications/freepublications/publication/technologyroadmap-energy-storage-.html [https://perma.cc/GEM9-9DZR]. Benefit stacking
entails tallying all the storage benefits in aggregate when performing multiple
tasks. Andy Colthorpe, Rocky Mountain Institute Report Recommends ‘Stacking
Benefits’ of Storage Business Models, PVTECH (Oct. 12, 2015), http://www.pvtech.org/news/rocky_mountain_institute_report_recommends_stacking_benefits_o
f_storage_bus [https://perma.cc/M6NB-9B4B].
316. Fares, supra note 313.
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integrated structure of old. In Texas, the wire companies that
build the power lines are still monopolies regulated by the
state, while electricity generators and retailers are
competitive.317 Oncor is a wire company—a regulated monopoly
that still goes to the Texas PUC for approval of new
investments that are then included in retail electricity bills
through “delivery charges.”318 Texas law prohibits such wire
companies from owning generation, however, and the PUC
would need to amend its rules to allow for this type of creative
proposal. As of early 2016, the Texas legislature did not
propose to grant the Texas PUC authority to approve an Oncortype battery storage proposal.319
This Oncor proposal reflects one of the trade-offs inherent
in the evolution to competitive markets. Although requiring
utilities to divest their generation assets facilitates more
competition, it also increases the transaction costs of procuring
reliability resources from external sources. This problem is
particularly acute with respect to multi-functioning resources
like energy storage, whose value can only be fully realized
where the user is able to capitalize on its multiple value
streams.320
In an effort to address the high transaction costs and
inefficiencies associated with a separation of ownership and
control, others have proposed utility ownership of various
distributed resources. Some have urged utility ownership of
resources that reside on private property as a way of tempering
opposition to distributed generation.321 Under this scenario, the
utility model would resemble that of Solar City’s leading model,
where private owners function as the host for the DER. Three
Id.
See ONCOR ELECTRIC DELIVERY CO. LLC, TARIFF FOR RETAIL DELIVERY
SERVICE, 10, 56 (effective Jan. 15, 2015), http://www.oncor.com/EN/Documents/
About%20Oncor/Billing%20Rate%20Schedules/Tariff%20for%20Retail%20Deliver
y%20Service.pdf [https://perma.cc/K2VV-MRFN].
319. 2015 Texas Legislature and Electric Power Policy: A Recap, HUSCH
BLACKWELL (July 2, 2015), http://www.huschblackwell.com/businessinsights/
2015-texas-legislature-and-electric-power-policy-a-recap [https://perma.cc/QMZ2GAN5].
320. See, e.g., Stein, supra note 10.
321. ELECTRIC POWER RES. INST., CREATING INCENTIVES FOR ELECTRICITY
PROVIDERS TO INTEGRATE DISTRIBUTED ENERGY RESOURCES (2007),
https://docs.google.com/file/d/0B836U49Yrh_QTGduUjk2RFpoTzg/edit?usp=sharin
g [https://perma.cc/HF6E-JG7Q] (addressing business models to advance the
integration of DERs, including utility ownership of those resources).
317.
318.
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jurisdictions have already provided regulatory approval to
allow utilities to own distributed generation resources like
rooftop solar: Tuscon Electric Power,322 Arizona Public
Service,323 and Georgia Power.324 Others have urged utility
ownership of the solar inverters used by rooftop solar
customers.325 If utilities could include such resources in their
rate-based assets, utilities may be able to receive a rate of
return on these assets. A new world of utility-owned DER
would minimize both coordination and visibility problems, as
the utility would have as much knowledge about the resources
as they would of their other, more traditional resources.
Similar approaches are being tested with respect to utilityowned storage. The Glasgow Electric Plant Board is one of the
first to take such an approach to energy storage, installing
utility-grade storage in 165 individual homes along with
software to manage the storage.326 Under this model, the
municipal utility owns the storage, uses the software to
maintain control, and coordinates with the customers as
hosts.327 Pursuant to the California PUC requirement to
submit distributed resource plans mentioned above, San Diego
Electric has proposed a “residential energy storage rate” pilot
program that would offer customers, at no upfront cost, thirdparty funded batteries.328 The utility would provide a reduced
322. TEP to Offer Residents Rooftop Solar, Expanding Local Renewable
Resources, TEP (Jan. 2015), https://www.tep.com/news/pluggedin/residentialsolar/ [https://perma.cc/U4RW-MMJ3].
PUBLIC
SERVICE,
323. Solar
Partner
Program,
ARIZONA
https://www.aps.com/en/ourcompany/aboutus/investmentinrenewableenergy/Page
s/solar-partner.aspx [https://perma.cc/X779-3CLF].
324. H.B. 57, 2015–16 Gen. Assemb., Reg. Sess. (Ga. 2015).
325. Stephen Lacey, Here’s a Way to Get Utilities to Embrace Solar and
Batteries: Let Them Own the Inverter, GREENTECH MEDIA (July 7, 2014),
http://www.greentechmedia.com/articles/read/should-utilities-own-solar-inverters
[https://perma.cc/ZL6K-KN4P].
326. Kentucky Municipal Power Company Uses Sunverge Energy Storage
Systems for Innovative Demand Response Program, SUNVERGE (Aug. 14, 2015),
http://www.sunverge.com/kentucky-municipal-power-company-uses-sunvergeenergy-storage-systems-for-innovative-demand-response-program/
[https://perma.cc/2EJE-U7XA].
327. U.S. DEP’T OF ENERGY, MUNICIPAL UTILITIES’ INVESTMENT IN SMART GRID
TECHNOLOGIES
IMPROVES
SERVICES
AND
LOWERS
COSTS
(2014),
http://energy.gov/sites/prod/files/2014/10/f18/SG-UtilityInvestment-Oct2014.pdf
[https://perma.cc/TBX3-2ECV].
328. Application of San Diego Gas & Electric Co. (U 902 E for Approval of
Distribution Resource Plan, Pub. Util. Comm’n of Cal., Docket No. A. 15-07-__
(July 1, 2015), https://www.sdge.com/sites/default/files/regulatory/A_15-07SDG&E_DRP_Application.pdf [https://perma.cc/3NSY-VTVF].
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rate for customers that allow the utility to draw on the
electricity stored in their behind-the-meter batteries at
certain, pre-agreed peak demand periods.329 In both situations,
the utility is using contracts to reduce the likelihood of
divergent interests and asymmetric information from getting in
the way of capitalizing on these distributed resources.
The most fundamental problem of reverting back to this
partial vertical integration through utility ownership of DER
assets, however, exists where there is a policy initiative to use
“competitive markets and risk-based capital as opposed to
ratepayer funding as a source of asset development.”330 This is
the situation in New York and the REV policy initiative
discussed above.331 In rejecting utility ownership of DER, the
Commission determined that there is a sufficiently “strong
level of interest in markets expressed by independent
providers” and sufficient concerns about “incumbent
advantages” of the utility to prohibit utility ownership of DER
on nonutility property subject to certain limited exceptions.332
This movement of utilities toward more of a “make”
organizational structure also raises interesting questions
regarding the optimal mix of internal and external sourcing.333
While there is some inherent appeal to the efficiencies
associated with a reintegration of the ownership of these
reliability resources with the utility, it is unclear if there is a
principled end point to such a reintegration. Is there a reason
to justify the reintegration of reliability resources and not
generation? Perhaps, but it is one that is deserving of a more
fulsome analysis than can be had here. Even if valid
justifications exist, regulators may be hesitant to carve out an
exception for reliability resources for fear of a slippery slope.
This Article takes a more immediate approach, asking what we
can do with minimal regulatory upheaval within the existing
regulatory structure.
329. Id. at 18–19.
330. See Order Adopting Regulatory Policy Framework and Implementation
Plan, supra note 127, at 67.
331. Id.
332. Id.
333. Sako et al., supra note 39, at 3 (evaluating legal services and identifying
factors impacting a greater likelihood of a firm to “make” a resource such as
greater resource co-specialization opportunities). The co-locating of solar panels
and energy storage may provide yet another interesting case study in further
research on the drivers of plural sourcing.
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In short, a combination of the preceding efforts would help
to bridge the gap between ownership and control of reliability
resources, increasing the likelihood for a more seamless
integration of reliability resources in a manner that contributes
to reliability of the grid. A priority should be placed on efforts
to incentivize customers who own reliability resources to work
with the grid operators to maximize both the private and public
benefits of these resources. It is likely that different strategies
are needed for different reliability resources. Coordination with
DR resources should be more manageable, given that their
value originates in contract. For those resources, a focus should
be twofold. First, regulators should identify residential
resources that can contribute to the commercial resources
currently in play. Second, policymakers can explore ways to
tailor the use of DR resources in a manner that acknowledges
the greater distribution associated with multiple individual
households as opposed to fewer commercial resources.
Coordination with energy storage resources will require greater
effort, both because of the multitude of energy storage forms, as
well as the ability of customers to reap the private benefits of
energy storage without regard for contracts. For these
resources, a more promising approach may involve a
combination of heightened visibility and contracts to better
align the interests of the utility and the customer.
CONCLUSION
After a hundred years of a centralized, fossil-fuel-fired
electric grid, renewable energy is starting to make its first
inroads. Essential to the success of increased penetration of
renewable energy, however, is ensuring the reliability of the
electric grid as it makes this transition. In fact, without proper
precautions, experts in the field believe that “[w]e are setting
ourselves up for a major reliability crisis.”334 Such a crisis can
be averted by harnessing the new generation of reliability
resources. This new generation includes energy storage and
DR, resources that may increasingly be provided by private,
nonutility customers. Reliability stakeholders need to
proactively acknowledge the changing reliability picture for
334. Electric Grid Reliability: Hearing Before the S. Comm. On Energy and
Nat. Res., 113th Cong. 46 (2014), http://www.gpo.gov/fdsys/pkg/CHRG113shrg87851/pdf/CHRG-113shrg87851.pdf [https://perma.cc/BEP3-DKXQ].
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this country and adapt in an effort to efficiently integrate these
distributed reliability resources into the grid. Utilities may
need assistance in managing the grid through regulatory
mechanisms that enhance transparency, coordination, and
contractual privity between those in charge of reliability and
those who own the resources. Given the future of increasing
distributed reliability, the legal regime governing reliability
needs to widen to account for these individual customers and
their more active participation in the reliability of the grid. As
one FERC Commissioner has indicated, “I have long stated
that I can be ‘fuel-neutral’ but I cannot be ‘reliabilityneutral.’”335
335.
Id. at 52.